If a person gets the rebate in income tax (less than or equal to 5 lakh income), does it mean he is not paying tax just as a person with income less than or equal to 2.5 lakh?

Yes, it’s true. Let us understand the logic behind this.

1. Tax slabs are applicable to all, i.e. Individuals, HUF, Private Trusts, AOPS and more. Raising a Tax slab would require separate mentioned to all the assessee while raising a Rebate u/s 87A bring the impact of these tax benefits only for individuals. In Simpler terms, they have to change the law for all assessee but by introducing rebate, they helped only the Individual Assessee and other assessee continue to pay Taxes normally.
2. A requirement for file the return is based on income more than the required limit and not whether you pay taxes or not. If they raise the tax slab then the number of filers shall decrease while giving rebate shall keep the filers in check.

Negative Impact –

A large mass of businesses falls under presumptive taxation where they file returns on an approximate basis. Since they are not giving marginal relief, a business having actual income from 5 lacs to 5.3 lacs (an approximate figure I took) would tend to understate its income so that it would bring the tax limit back to Zero.

Marginal Relief:-

It’s a benefit provided by Income tax in certain cases where your marginal tax would be calculated based on your marginal income. For Eg: if a change in income will change your tax slab and it will attract additional taxes such as surcharge. Then Due to marginal relief, only the increased income will be collected as Tax. Suppose you earned Rs. 50 lacs and will result in 15 lacs of tax. 50.25.000/- will result in a surcharge of 10% on the 15 lacs tax. Thus, if you earn 50 lacs your tax comes as 15 lacs but if you earn 50.25 lacs, your tax comes as 16.5 lacs due to a change in the slab. In such cases marginal relief is brought which says that only the additional 25000 will be charged as tax and not the entire 1.5 lacs.

Thus, A marginal Relief was very much required in this case of rebate u/s 87A which is missing.

Hope this Helps.