Overview of the Issue
After a recent update to the tax-filing utility on the income tax portal this month, many taxpayers are facing the unexpected issue of being denied a valid rebate of up to Rs 25,000 under the new tax regime. This problem specifically affects those who have booked short-term capital gains, contradicting the provisions of the Income Tax Act, 1961.
Understanding the Rebate
A rebate is designed to provide relief on income tax for low-income earners, encouraging them to file their tax returns. As per the Union Budget 2023, individuals opting for the new tax regime can claim a rebate of up to Rs 25,000 if their taxable income is below Rs 7 lakh.
Anomaly in Taxable Income Perception
The issue arises from a misinterpretation of what constitutes "total taxable income." Chartered accountants point out that this error affects hundreds of low-income earners. One tax expert noted, “We are witnessing this peculiar trend under the New Tax regime. Taxpayers whose net income is below Rs 7 lakh aren’t able to claim the full rebate of Rs 25,000 under Section 87A if they have short-term capital gains (STCG) taxed at 15 percent included in their income. The updated utility is denying such rebate on all special rate taxable incomes.”
Prior Availability of Rebate
Interestingly, this rebate was available for returns filed before July 5, 2024. Tax experts revealed that until this date, returns for the assessment year 2024-25 allowed the rebate despite the inclusion of short-term capital gains.
Misinterpretation and Its Impact
Post-update, the utility’s interpretation has led to the denial of the rebate, which experts argue is incorrect. They emphasize that the Income Tax Act does not state that special incomes should be excluded from the rebate under Section 87A, except for long-term capital gains on equity shares taxable at 10 percent under Section 112A.
According to Section 111A, taxpayers with a gross total income below Rs 7 lakh, including STCG, should still be eligible for the rebate. The only restriction is for long-term capital gains tax under Section 112A.
Examples of Impact
To illustrate the issue, consider John*, who has a salary income of Rs 5 lakh and Rs 2 lakh in short-term capital gains on equity shares, making a total income of Rs 7 lakh. Before July 5, he was allowed a full rebate on his total income under Section 87A. Now, he can only claim the rebate on his salary income, not on his short-term capital gains.
Conversely, Marie* has Rs 6.5 lakh in salary and other income plus Rs 3 lakh in short-term capital gains, totaling Rs 9.5 lakh. Although her total income exceeds the Rs 7 lakh threshold, the faulty utility still allows her a rebate of Rs 20,000 under Section 87A, based on her salary income alone.
Future Implications
This anomaly might result in many taxpayers receiving notices later in the year, while genuine taxpayers lose out on the rightful tax benefit of up to Rs 25,000. Tax experts stress that the Income Tax Act has not been amended to deny the rebate for those with special rate income.
Another tax expert commented, “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 the normal slab rate for non-shares short-term capital gains tax.”
Technical Snags and Delays
With ongoing technical issues and delays in accessing the Annual Information Statement (AIS) on the income tax portal, these errors add to the frustration for taxpayers. The update has compounded the challenges, leading to further hassles in the tax filing process.
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