Summary: The Income Tax Department has begun processing tax returns with unexpected demands, particularly for those with capital gains income, due to the disallowance of the Section 87A rebate. This rebate, available under both the old and new tax regimes, offers a reduction in tax liability for incomes below specific thresholds. However, the department’s recent update to the ITR utility (on July 5, 2024) has caused confusion by incorrectly disallowing this rebate for various special rate incomes, such as short-term capital gains (STCG), even when they should still qualify. Long-term capital gains (LTCG) from equity shares or mutual funds are excluded from this rebate, but other special rate incomes, like speculative income and virtual digital assets (VDAs), still qualify. The discrepancy between the law and the ITR utility has raised concerns, leading to demands for corrective action from the Finance Ministry. Until these corrections are made, taxpayers are advised to wait before paying any demands based on this error, as the department is expected to reprocess affected returns.
Update on 18/11/2024: The Gujarat High Court has dismissed a PIL concerning the Section 87A rebate issue, deeming it unsuitable for such a petition. The matter was withdrawn with the court granting liberty to aggrieved taxpayers to file a writ petition before the appropriate tax bench. While the merits of the rebate issue remain unaddressed, taxpayers impacted by its denial can still challenge it through proper legal channels. This development highlights the need for organizations like ICAI and other tax bodies to advocate for a re-evaluation by the CBDT. Affected individuals are advised to consult their tax advisors for guidance on next steps, whether to file a writ or await further updates.
Update on 16/10/2024: On 16/10/2024, a PIL was filed before the Gujarat High Court by CA Chintan N. Patel, represented by Advocate CA Rutvij Patel, challenging the legality of these demands and seeking relief for the affected taxpayers. Fortunately, the outcome of this case is expected to favor the taxpayers in the coming days.
Page Contents
Introduction:
The Income Tax Department has started processing several returns with demand, especially for taxpayers whose source of income is from capital gains. This main reason for the demand is the department is disallowing the rebate under Section 87A for capital gains under the new tax regime. In many cases, taxpayers are also not given the benefit of the unexhausted threshold limit, and only the basic rebate of Rs. 25,000 under Section 87A is being considered. This is leading to situations where even a simple return, with just Rs. 3,00,000 of capital gain income, results in a demand after processing.
Before diving into the issue, it is essential to understand the provisions of Section 87A.
Rebate Under Section 87A
A rebate is a reduction in the tax liability. Under Section 87A, the maximum rebate limit is Rs. 12,500 under the old tax regime and Rs. 25,000 under the new tax regime. This rebate can only be claimed if the taxpayer’s taxable income does not exceed the prescribed limit for that financial year. Under the new tax regime, resident individuals with taxable income up to Rs. 7,00,000 are eligible for the rebate. Under the old tax regime, the maximum annual income eligible for the rebate was Rs. 5,00,000, with a maximum rebate of Rs. 12,500.
How this Rebate Works under the New Regime and When It’s Not Applicable?
In the old regime, the maximum rebate was Rs. 12,500. Under the new regime, taxpayers with income less than Rs. 7 lakh are eligible for a rebate of up to Rs. 25,000 under Section 87A. In case the income exceeds Rs. 7 lakh, Rebate under marginal scheme will be available.
However, in certain cases, the rebate is not applicable, such as:
- For non-residents.
- On long-term capital gains from the sale of equity shares or equity-oriented mutual funds taxable under Section 112A.
Even if the total income is less than Rs. 7 lakh, the rebate is not available in above cases. However, other special rate incomes like STCG, speculative income, virtual digital assets (VDAs) etc. would still qualify for the rebate under Section 87A, as there is no specific provision disallowing it for these incomes.
The Problem: Mismatch Between the Act and ITR Utility
Up until July 5, 2024, there was no confusion regarding the rebate under Section 87A, and the e-filing portal was functioning properly. However, after updation of the new ITR utility on July 5, 2024, the department began incorrectly disallowing the rebate for various special rate incomes, including short-term capital gains (STCG) taxable at 15% under Section 111A. This change was made without any amendments to Section 87A or the respective special income sections of the Income Tax Act.
As a result, taxpayers with total incomes of up to Rs. 5 lakh (under the old regime) or Rs. 7 lakh (under the new regime) are being forced to pay tax on special rate incomes like STCG, which is against the provisions of the law.
Author’s Commentary on the Issue
According to Section 112A(6), the rebate under Section 87A is not available on long-term capital gains (LTCG) from the sale of listed equity shares or equity-oriented mutual funds. However, this restriction applies only to LTCG, not STCG. Therefore, taxpayers with STCG should still be eligible for the rebate under Section 87A.
While LTCG on listed shares and equity mutual funds is excluded from the rebate, LTCG on other assets like real estate or unlisted shares can still benefit from the rebate. Even other special rate incomes like speculative income and virtual digital assets (VDAs) still qualify for the rebate under Section 87A
Key Questions Raised by This Issue
- How can there be a discrepancy between the provisions of the Income Tax Act and the functioning of the ITR utility?
- Why was the tax computation in the utility changed mid-way through the filing period?
- If the department intended to disallow the rebate on capital gains, why did the portal allow filing with the rebate until July 5, 2024?
What Should Taxpayers Do Now?
If you have claimed the rebate under Section 87A on eligible income and your return has been processed with a demand, there is no need to rush to pay the demand immediately. Many representations have been made to the Finance Minister, including by BCAS, to correct the utility and processing system. Once these corrections are made, the department is expected to reprocess the returns automatically, nullifying any demands.
In summary, while the rebate under Section 87A remains a vital benefit for taxpayers with incomes below Rs. 7 lakh, the current ITR utility has created confusion. Until the issue is resolved, it’s advisable to wait for a correction rather than paying any unjustified tax demands.
Conclusion:
Generally, the Laws are declared well before the beginning of financial year so that assessee can plan his taxation. Why there is a sudden modification post 5th July for restricting 87A rebate after the end of FY that too after Lacs of ITRs have been filed availing such benefit. This is cruel/unethical move by the department impacting Lacs of assessee.
To avoid such discrepancies in the future, it is essential that the Income Tax Department ensures that any updates to the ITR utility are consistent with the provisions of the Income Tax Act. Before making any changes to the e-filing portal or return filing utilities, thorough testing and validation should be carried out to ensure alignment with the law. Additionally, timely communication regarding any amendments or changes to the filing process should be provided to taxpayers, reducing confusion and preventing unintended demands. By enhancing coordination between the legislative framework and the technology platforms, the department can prevent such errors and safeguard taxpayers from unnecessary financial stress. Clear and precise guidelines for both taxpayers and officers will ensure smooth compliance and foster confidence in the system.
I hope this article helps you understand the issue and provides guidance on how to address it effectively. In case of any query, you can reach out to me on [email protected].
(Republished with amendments)
Author Bio
Sir I have filed my return on 16th July 2024 through Winman Software. My total Income is below 7 Lakhs. While filing return It shows Tax Liability Nil. Now I got Notice u/s 143(1) to pay Rs. 16000/- due to non availability of rebate u/s 87A on Short term capital gain on Equity shares. I read your above article. Thanks for your valuable information. May I know If Income tax starts Reprocess These type of Income tax returns whether they process returns filed after 5th July 2024 ? Because i have filed my return after update in utility and i have filed through winman.
Hello Sir,
I was preparing my ITR for fy2324 & was shocked when winman gave error pop up re the difference in calcution of tax between department & winman.
I am senior citizen.
My total income is less than 5 lacs. (STCG2,14,000)
And tax liability 31000 + ,because of ambiguity caused by 87a. I have lost my sleep. This is really cruelty.
I want to know what is the lastest update on this.
Should I file return claiming rebate u/87a or wait till the things are clear .
Request your help.
Thanks & Regards,
Hi Sir,
I have also received intimation u/s 143(1) asking for Tax Payable Rs . 17500 after Deducting my refund for TDS receivable for rs. 5260 against tax of rs. 22760 as i have file my ITR under new regime . i don’t even have option to revise my return under old scheme as it will be benfecial for me as it will only required to pay me rs 200 for tax after rebate of rs 12,500 as it will be allowed under old scheme .
Now i wants to ask that 1. if i had filed under old scheme whether same rebate would have disallowed ?
2. Now I should wait for the High Court Judgement against PIL Filed in gujarat high court for same case or pay the amount ?
1. If you had filed under the old regime, the rebate under Section 87A would have been allowed, as the disallowance issue is specific to the new tax regime.
2. Regarding your next steps, the PIL filed in the Gujarat High Court on this matter was dismissed as withdrawn, with the court granting liberty for an aggrieved taxpayer to file a writ petition before the appropriate tax bench.
At this stage, you may choose to wait for further clarity from the CBDT or file an appeal to challenge the demand. Alternatively, you could pay the demand to avoid further interest accumulation, but note that a refund may not be guaranteed even if the department resolves the issue later.
Consulting a tax advisor to weigh the best course of action for your situation is advisable.
Hello Sir, In my case rebate u/s 87A is disallowed on LTCG on sale of immovable property.I had filed the return on 5/7/24 with a refund due of rs. 38K but due to this problem my intimation order u/s 143(1) has reduced the refund amount to rs. 22K.Whether my return will be reprocessed and balance amount of refund amounting to rs. 16K will be paid or shall I file a revised return?What action shall I take, please guide?
Hopefully, the department will update their utility and reprocess the refund automatically, so you won’t need to take any further action.
Thank you for your message!
If you have already filed for rectification but the same demand has reappeared, you have another option to file a revised return if there’s a mistake in your original filing. The deadline for filing the revised return is 31st December of the assessment year.
is this rebate of 25000 also not allowed for LTCG From sale of immovable property???
Hi Sir,
As mentioned above, the rebate u/s 87A is not available only on tax on LTCG from the sale of listed equity shares or equity-oriented mutual funds. Therefore, taxpayers with LTCG on the sale of Immovable property should still be eligible for the rebate u/s 87A.
Nicely written article, Harshil. I just want to know one point. My total income from the year was within tax-free limit & I earned merely Rs 23000 from shares last year. Accidentally, while filing ITR is was mentioned as 61,000. Now the IT is demanding Rs 9600 from me. I appealed for a rectification. But the same demand has arrived once again via mail. What to do in this case?
Thank you for your message!
If you have already filed for rectification but the same demand has reappeared, you have another option to file a revised return if there’s a mistake in your original filing. The deadline for filing the revised return is 31st December of the assessment year.
Thank you very much for your reply. Kindly let me know another point. As, I have just earned Rs. 23000/- from short-term shares last year, do I have to pay income tax in this regard?
Dear Sir,
If your income is less than Rs 7 lac under the new regime, you can get a rebate from your tax payable of Rs. 25,000.
Dear Harshil, Thanks a lot for the kind reply. I have filed a rectified return, still Income Tax Dept. is asking for Rs 4000 tax for a STCG of Rs. 24000. (My overall income is within the tax limit). I am not being allowed any rebate on STCG. What to do in this case?
Very helpful article explaining the ongoing issue! Could you help me with the following questions? Is there any update on this situation? Would you suggest waiting, if so, how long can I wait before interests and penalties starts adding to the principal amount in demand? If I pay the demand and IT department retracts this decision, will I receive the refund?
Thank you for your message!
1. There’s no update from the department yet.
2. If the amount is small, you can consider paying the demand to settle it, but if it’s not, it may be worth waiting for clarification. However, remember that penalties and interest may accumulate.
3. I don’t think paying the demand guarantees a refund if the IT department later retracts its decision. You likely won’t get a refund in such a case.
Feel free to reach out if you need more help!
any update on this to BCAS from finance ministry?
some says you should pay demand and close the matter
what to do?
this is clear “harrasment and extortion” by IT department and Finance ministry to middle class
please some Law expert CAs file case in high court otherwise it will harm all middle class
No not yet.
Ok Thanks for Update
Another issue with the demand I have received is that it also puts a penalty on the amount. This is atrocious. Even if this is a valid demand – this is due to errors in the IT Dept systems , why should they ask honest taxpayers to pay penalty for their mistakes? I thank you for the article Harshil but the decision to wait for a decision is painful – the penalty will increase month by month and you never know if the decision will even happen any time soon.
Dear Sir,
I completely understand your concern, but unfortunately, we can’t take any action other than waiting for the department to update their portal. While you do have the option to file an appeal against the intimation with the CIT, please note that the hearing may take 6 to 9 months. Given this, it would be more practical to wait for the department to resolve the issue.
Controversy with regard to S 87A rebate in Tax utility before 5th July allowing the same vs post 5th July not allowing and IT department processing IT returns with huge liability for individual, Senior citizen is creating harassment. Department needs to clarify the position