On July 5, 2024, the Income Tax Department updated the Income Tax Return (ITR) utility, introducing significant changes to the rebate under Section 87A. These changes have particularly impacted taxpayers with special rate incomes such as short-term capital gains (STCG) on shares under Section 111A, long-term capital gains (LTCG) under Section 112A, lottery winnings, and income from gaming. This update has led to concerns and confusion among taxpayers and professionals alike.
Pre-July 5 Scenario
Before the update, the ITR utility and tax calculator allowed the Section 87A rebate for STCG under Section 111A and other special rate incomes, except for LTCG under Section 112A, which explicitly restricts the rebate. The specifics were as follows:
- STCG under Section 111A: Rebate under Section 87A was allowed.
- LTCG under Section 112A: Rebate under Section 87A was not allowed as per the explicit provision.
- Other special rate incomes: Rebate under Section 87A was allowed.
Post-July 5 Scenario
After the update, the ITR utility no longer provides the benefit of the Section 87A rebate for any special rate incomes, including STCG under Section 111A. This change has caused a significant impact on taxpayers who relied on these rebates to reduce their tax liability. Here are the updated specifics:
- STCG under Section 111A: Rebate under Section 87A is no longer allowed.
- LTCG under Section 112A: No change, rebate under Section 87A remains not allowed.
- Other special rate incomes: Rebate under Section 87A is no longer allowed.
Know the change by watching this video:
Concerns Raised by ICAI
The Institute of Chartered Accountants of India (ICAI) has brought this issue to the attention of the Income Tax Department, highlighting the hardships faced by taxpayers due to the recent changes. In a letter addressed to the Joint Secretary (TPL)-II of the Central Board of Direct Taxes (CBDT), ICAI has requested the reinstatement of the Section 87A rebate for STCG under Section 111A and LTCG under Section 112.
Key Points from the ICAI Letter:
- Impact on Taxpayers: The denial of rebate under Section 87A for STCG and LTCG results in higher tax liability for taxpayers with special rate incomes, causing genuine hardship.
- Section 112A Specific Restriction: The explicit restriction on rebate for LTCG under Section 112A does not extend to STCG under Section 111A and other special rate incomes, leading to inconsistency in tax treatment.
- Recommendation: ICAI has suggested that the Income Tax Department update the ITR utility to provide the rebate under Section 87A for STCG chargeable under Section 111A and LTCG chargeable under Section 112, aligning with the relevant provisions of the law.
Detailed Analysis of Tax Rates and Rebate Eligibility:
| Type of Income | Section | Tax Rate | Rebate u/s 87A Allowed? |
|---|---|---|---|
| Short-Term Capital Gains (STCG) on Shares | 111A | 15% | Pre-July 5: Yes Post-July 5: No |
| Long-Term Capital Gains (LTCG) on Shares | 112A | 10% | No (Explicit Restriction) |
| Long-Term Capital Gains (LTCG) (No STT Paid) | 112 | 20% | Pre-July 5: Yes Post-July 5: No |
| Lottery, Betting, Gambling, etc. | – | 30% | Pre-July 5: Yes Post-July 5: No |
| Online Gaming | – | 30% | Pre-July 5: Yes Post-July 5: No |
| Virtual Digital Assets (VDA) | – | 30% | Pre-July 5: Yes Post-July 5: No |
The ICAI has recommended that the Income Tax Department address these issues promptly to ensure fair treatment of taxpayers and align the tax utility with the provisions of the Income Tax Act. The resolution of this matter is eagerly awaited by the taxpayer community.
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