After an updation of tax-filing utility on the income tax portal this month, taxpayers are being forced to give up a valid rebate of up to Rs 25,000 under the new tax regime if they have booked short-term capital gains, which overrides the Income Tax Act, 1961.
A rebate is a waiver given on income tax to help low-income earners reduce their taxes, which ensures that they file their tax returns. As per the Union Budget 2023 change, individuals opting for the new tax regime are permitted to claim a rebate of up to Rs 25,000 if their taxable income is below Rs 7 lakh.
The anomaly is caused by a different perception of what is “total taxable income” and needs to be corrected as it affects hundreds of low-income earners, say chartered accountants.
Discovering the change, Mayank Mohanka, Founder Director at TaxAaram India, says, “We are witnessing this peculiar trend under the New Tax regime, wherein those, whose net income is below Rs 7 lakh aren’t being able to claim the full rebate of Rs 25,000 u/s 87A, if they have booked a short-term capital gains (STCG) of 15 percent, included in such income, as the new utility is denying such rebate on all special rate taxable incomes.”
Surprisingly, this rebate was available for returns filed before July 5, 2024.
Also read: How to file income tax returns for the financial year 2023-24
Updation in utility, rebate declined
The rebate was permitted on income earned in FY 2023-24. Tax experts told Moneycontrol that returns filed in AY 2024-25, up to July 5, have been permitted to claim this rebate, despite booking short-term capital gains.
“After the income tax utility was updated (July 5, 2024), taxpayers aren’t able to claim the full rebate u/s 87A. The interpretation made by the relevant officer is erroneous as the Income Tax Act or any amendment doesn’t mention that all special incomes claimed will be denied the rebate u/s 87A. Only restriction provided in the Act is in respect of long term capital gains income on equity shares taxable @ 10% u/s 112A.” Mohanka adds.
As per section 111A, even if you have booked STCG, where the gross total income is less than Rs 7 lakh, you could still claim the rebate.
Only under Section 112A, where the mention of long-term capital gains tax of 10 percent without any indexation has been claimed, a clause has been inserted claiming that the 87A rebate wouldn’t be permitted, Mohanka says.
Also read: Budget 2024: Will government offer capital gains tax relief to investors?
One law, multiple interpretations
Mohanka explains with the help of examples. Take for instance the case of Rajesh*, who has a salary income of Rs 5 lakh salary and Rs 2 lakh worth of short-term capital gains on equity shares, thus a total income of Rs 7 lakh. Prior to 5th July, he was allowed full rebate on his total income of Rs 7 lakh u/s 87A. But currently, utility is allowing him rebate only in respect of his salary income of Rs 5 lakh and is denying him the rebate on his short term capital gain income on equity shares.
On the other hand, Surbhi*, who has Rs 6.5 lakh of salary and other income and short-term capital gains of Rs 3 lakh, thus a total income of Rs 9.5 lakh. As per correct interpretation of the law, she shouldn’t get any rebate u/s 87A since her total income is in excess of Rs 7 lakh. But the faulty return filing utility is allowing her a rebate of Rs. 20,000 u/s 87A on the interpretation that since her salary income of Rs 6.5 lakhs taxable at normal rates is within the threshold limit of 7 lakhs, no matter her total income exceeds such limit.
Chances are that many taxpayers would receive a notice later during the year, while genuine taxpayers would end up forgoing the rightful tax benefit of up to Rs 25,000.
This is because, under the Income Tax Act, 1961, there has been no amendment claiming that someone who has claimed a special rate income needs to be declined the rebate.
Elaborating on the issue, Paras Savla, partner at KPB & Associates, says, “The rebate has been permitted until recently. However, it should be noted that short-term capital gains on shares are taxed at a concessional rate of 15 percent, compared to normal slab rate as applicable to non-shares short-term capital gains tax.”
With tremendous delay in filing returns due to non-access to AIS and technical snags on the income tax portal, such errors could lead to further hassles for tax assesses.
*Names and examples used for illustration purposes.
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