a) Introduction
Income tax rebate under section 87A of the Income-tax Act, 1961, offers significant relief to eligible taxpayers by reducing their net tax payable to nil. However, recent updates to the Income Tax Return (ITR) filing utilities have caused issues, particularly for taxpayers with special rate incomes such as short-term capital gains (STCG) of equity shares or equity oriented mutual funds taxable at 15%. Previously, such taxpayers could avail the rebate, but the new utility restricts this benefit, leading to increased tax liabilities. This update affects both the government portal and offline modes, while many private tax software solutions remain outdated. Taxpayers who filed ITRs before the update or with outdated software may receive notices due to these discrepancies. This article explores the current challenges and implications of these updates.
b) Understanding Section 87A
Section 87A provides a tax rebate to reduce the net tax payable to nil for eligible taxpayers. Under the old tax regime, this rebate is available for those with a total income up to Rs 5 lakh, and under the new tax regime, for those with a total income up to Rs 7 lakh. However, an update on July 5, 2024 in Tax Portal Utility, has resulted in many taxpayers being denied this benefit if they have special rate incomes.
c) Pre- and Post-Update Scenarios:
>Before July 5, 2024:
Business/Salary Income: Rs 5,50,000
STCG u/s 111A: Rs 30,000
Total Taxable Income: Rs 5,80,000
Tax Calculation:
Tax on Business/Salary Income:
Up to Rs 3,00,000: NIL
Rs 3,00,001 to Rs 5,50,000: Rs 12,500 (2,50,000 * 5%)
Tax on STCG u/s 111A: Rs 4,500 (30,000 * 15%)
Total Tax: Rs 17,000
Rebate u/s 87A: Rs 17,000 (as total income is less than Rs 7 lakh)
Net Tax Payable: Rs 0
>After July 5, 2024:
The same taxpayer would no longer receive the rebate on the STCG portion. The rebate is only applied to the normal rate income.
Tax Calculation:
Tax on Business/Salary Income:
Up to Rs 3,00,000: NIL
Rs 3,00,001 to Rs 5,50,000: Rs 12,500 (2,50,000 * 5%)
Tax on STCG u/s 111A: Rs 4,500 (30,000 * 15%)
Total Tax: Rs 17,000
Rebate u/s 87A: Rs 12,500 (only on normal rate income)
Net Tax Payable: Rs 4,500 plus cess @4%
d) Impact of the Utility Update
The update to the ITR filing utilities on July 5, 2024, which affects both the official IT web portal and offline utility mode, has resulted in increased tax liabilities for taxpayers who would have previously benefited from the section 87A rebate. Interestingly, many private tax return software solutions have not yet implemented this update, leading to inconsistencies in tax filing experiences.
e) Tax provision:
The following Proviso is inserted in Section 87A by the Finance Act, 2023, w.e.f. 1-4-2024: “Provided that where the total income of the assessee is chargeable to tax under sub-section (1A) of section 115BAC, and the total income does not exceed seven hundred thousand rupees, the assessee shall be entitled to a deduction from the amount of income-tax (as computed before allowing for the deductions under this Chapter) on his total income with which he is chargeable for any assessment year, of an amount equal to one hundred per cent of such income-tax or an amount of twenty-five thousand rupees, whichever is less;”
f) Long term Capital Gains u/s 112
There is a condition as per Section 112A (6) that such tax rebate under section 87A is not available on Long Term Capital Gains. Regretfully, this condition is only for Long Term Gains, and not for short term gains, and ideally STCG cases still have to be eligible for Rebate of section 87A.
g) Another concern:
The updated ITR utilities have inconsistently applied the rebate. For instance, some taxpayers receive the rebate even if their total income exceeds Rs 7 lakh under the new tax regime, which could lead to potential discrepancies and future litigation risks.
Example of Inconsistency:
Salary: Rs 6.95 lakh
STCG u/s 111A: Rs 4 lakh
Total Income: Rs 10.95 lakh
Post-update, the utility still provides a rebate of Rs 24,500 u/s 87A for a total income of Rs 10.95 lakh, due to the special rate income being taxed separately.
h) Income Tax Notice
If you filed your ITR before July 5, 2024, using the government tax portal utility or private ITR preparation software, you might receive an income tax notice due to discrepancies caused by the subsequent updates to the utility. The changes implemented on July 5 could result in reassessments and additional tax liabilities for those filings. Similarly, if you filed your ITR after July 5 using private ITR preparation software that has not been updated to reflect the new rules, you could also face issues. These inconsistencies between old and new utility calculations may lead to potential penalties and compliance problems, underscoring the need for immediate clarification and resolution by the Income Tax Department.
The recent changes in the ITR filing utilities have created significant challenges for taxpayers eligible for the section 87A rebate. The Ministry of Finance needs to address this issue promptly to ensure fair and accurate tax assessments and avoid unnecessary disputes. Tax professionals and taxpayers are urged to seek clarification and push for a resolution to prevent further complications as the filing season progresses.
i) Call to Action
It is imperative for the Income Tax Department to provide clear guidelines and update the filing utilities to reflect the legislative intent accurately. This will help in reducing the tax burden on eligible taxpayers and ensure compliance with the provisions of the Income-tax Act, 1961. Tax professionals and taxpayers should remain vigilant and seek professional advice if they encounter issues during the filing process.
j) Author’s View
Given the discrepancies and issues with the updated ITR utilities, it is high time for the Income Tax Department to provide clear guidelines and rectify the utility to reflect the legislative intent accurately. Taxpayers are currently in a dilemma about whether to use the old or new utility, and clarity is essential to avoid further complications.
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Article by: CA. Sagar Gambhir | FCA, DISA (ICAI), DIRM (ICAI), AIII, B.COM
Author can be reached at casagargambhir@gmail.com for any queries, issues & recommendations relating to article. Any feedback for improvement would be really appreciated.
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