Following the July 5 update, the ITR filing utilities are not allowing the rebate under section 87A for various special rate incomes.
The income tax rebate under section 87A of the Income-tax Act, 1961, provides a significant benefit by reducing a taxpayer’s net payable tax to nil if they meet certain income conditions. This rebate is available to taxpaye.rs with an income up to Rs 5 lakh under the old tax regime or up to Rs 7 lakh under the new tax regime. However, an update in the ITR filing utility on July 5, 2024, has led to many taxpayers being denied this benefit if they have special rate incomes.
Rebate Denial for Special Rate Incomes
Following the July 5 update, the ITR filing utilities are not allowing the rebate under section 87A for various special rate incomes, including short-term capital gains (STCG) on equity shares or equity-oriented mutual funds taxed at 15% under Section 111A. As a result, taxpayers with total incomes up to Rs 5 lakh (old regime) or Rs 7 lakh (new regime) are now required to pay income tax on their special rate taxable incomes, excluding Section 112A, contrary to the provisions of the Income Tax Act, 1961, due to a faulty return filing utility.
Eligibility for Tax Rebate Under Section 87A
STCG are taxed at a special rate of 15%, while long-term capital gains (LTCG) from the sale of equity shares and mutual funds are taxed at a 10% special rate for gains above Rs 1 lakh. According to CA Hardik Kakadiya, President of the Chartered Accountants Association Surat, Section 112A (6) specifies that the tax rebate under section 87A is not available for LTCG, but this condition does not apply to STCG. Therefore, STCG cases should still be eligible for the rebate under section 87A.
If taxpayers have LTCG from the sale of listed equity shares or equity-oriented mutual funds, they cannot claim a rebate under section 87A for that income. However, the rebate can be claimed for LTCG from other assets like real estate or unlisted shares. Additionally, incomes charged at special rates, such as gambling winnings, online games, betting earnings, game show earnings, and virtual digital assets, are not eligible for the rebate under section 87A, as noted by CA Abhishek Soni, co-founder of Tax2Win.
Issues with the Tax Department’s Software
CA Hardik Kakadiya explains that the tax department’s software is currently not allowing the tax rebate under section 87A for STCG due to an incorrect interpretation of the law. The updated ITR filing utilities are restricting this rebate without any corresponding amendments in section 87A or related special income sections of the Income Tax Act. The BCAS has made a representation to the Finance Ministry, hoping for a swift resolution.
Kakadiya suggests that the issue stems from a misinterpretation of the words “Notwithstanding anything contained in this Act but subject to the provisions of this Chapter” in Section 115 BAC (1A), which was quietly inserted effective April 1, 2024. He urges the Ministry to intervene promptly, especially as it is the end of the filing season for non-audit taxpayers.
Representations by Tax Consultant Associations
The All Gujarat Federation of Tax Consultants and the Income Tax Bar Association made a joint representation on July 15, 2024, noting that before July 5, 2024, the income tax utility allowed the rebate under section 87A against the tax on STCG on shares under section 111A and other special rate incomes, except for LTCG under section 112A.
They emphasized that taxpayers with a total income not exceeding Rs 5 lakh (old regime) or Rs 7 lakh (new regime) should be eligible to claim the rebate against their normal rate income and special rate income under section 111A and 112. If the total income includes LTCG under section 112A, the rebate should be allowed from the income-tax on the total income, reduced by the tax payable on such capital gains.
Response from the Tax Department
Screenshots shared on social media and in representations by BCAS, All Gujarat Federation of Tax Consultants, and the Income Tax Bar Association reveal the tax department’s response to grievances about the denial of the section 87A rebate. The department’s support agents stated that if the total taxable income includes special rate incomes up to Rs 7 lakh (new regime), the rebate under section 87A will only apply to the extent of taxable income charged at normal rates, as “Rebate u/s 87A (1A) is not allowed for any special rate income.”
In conclusion, the denial of the section 87A rebate for STCG from shares or mutual funds due to software issues is causing significant inconvenience for taxpayers. Experts and tax consultant associations are advocating for a resolution, and the Finance Ministry’s intervention is anticipated to rectify this issue.
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