Understanding Recent Change in ITR utility for Rebate u/s 87A after 5 July 2024

As the income tax return (ITR) filing season is underway in July 2024, with the last date to file ITR for non-audit cases being July 31, it is crucial to understand the recent updates and changes to tax rebates, especially under Section 87A.

Overview of Income Tax Regimes

There are two regimes of income tax: the old regime and the new regime. Under the old regime, a rebate under Section 87A is allowed on income up to ₹5 lakh. However, in the new regime, this limit has been increased to ₹7 lakh, as announced in the Union Budget 2023.

Key Changes Post- July 5, 2024 Update

On July 5, 2024, the Income Tax Department updated the ITR utility, which introduced significant changes to the rebate under Section 87A. These changes particularly affect those with special rate incomes such as short-term capital gains (STCG) on shares under Section 111A, long-term capital gains (LTCG), lottery winnings, and income from gaming.

Pre-July 5 Scenario

Before the update, the ITR utility and tax calculator allowed the 87A rebate for STCG under Section 111A and other special rate incomes, except for LTCG under Section 112A, which explicitly restricts the rebate.

Post-July 5 Scenario

After the update, the utility no longer provides the benefit of the Section 87A rebate for special rate incomes, including STCG under Section 111A. This has raised significant concerns and confusion among taxpayers and professionals.

Key Points of Contention

Budget Speech and Memorandum: The Union Budget 2023 speech by the Hon. Finance Minister Nirmala Sitharaman emphasized increasing the rebate from ₹12,500 to ₹25,000 for the new regime, without any additional restrictions. This intention was to extend the benefit without curtailing any existing allowances.

Finance Bill 2023: The initial Finance Bill only proposed changes in the monetary limits, increasing the rebate threshold from ₹5 lakh to ₹7 lakh and the rebate amount from ₹12,500 to ₹25,000. The wording of the final Act, which included provisions for marginal relief, did not intend to restrict already available benefits.

Income Tax Portal FAQs: The FAQs on the Income Tax portal clearly state the increased limit without mentioning any additional differences in the application of Section 87A between the old and new regimes.

LTCG and STCG: While Section 112A specifically restricts the rebate on LTCG, no such restriction exists for STCG under Section 111A or any other special rate incomes in the new regime.

Interpretation of Total Income: The interpretation by the Department to exclude special rate incomes from the rebate calculation is considered incorrect by many professionals. The concept of total income should be indivisible, and the rebate should apply to the entire total income, including parts taxed at special rates.

Reply by Income Tax Department

Examples to Clarify the Issue

Consider two scenarios to illustrate the impact of the recent changes:

1. Scenario 1: Income up to ₹7 Lakh under the New Regime (Without Special Rate Income)
   • If an individual has a total income of ₹7 lakh, they would be eligible for the ₹25,000 rebate under Section 87A, resulting in zero tax liability.
2. Scenario 2: Income Including Special Rate Income
   • If an individual has a total income of ₹7 lakh, including ₹2 lakh as STCG under Section 111A, the recent changes mean they would not be eligible for the rebate on the special rate income portion. This interpretation would result in a higher tax liability, contrary to the initial benefits intended by the Budget 2023.

Examples of Tax Calculation

Assumptions:

• Tax Rebate under Section 87A before 5th July 2024 is available on total income up to ₹7 lakh including special rate incomes.
• Tax Rebate under Section 87A after 5th July 2024 excludes special rate incomes for the rebate calculation.

Example 1: Normal Income (No Special Rate Income)

Example 2: Income Including STCG under Section 111A (₹2,00,000)

Example 3: Income Including Lottery Winnings (₹2,00,000)

Example 4: Mixed Income Including Both Normal and Special Rate Income

Impact Summary

• Before 5th July 2024: The rebate under Section 87A was available on total income up to ₹7 lakh, including special rate incomes such as STCG and lottery winnings, reducing the net tax payable significantly.
• After 5th July 2024: The rebate under Section 87A excludes special rate incomes from the rebate calculation, resulting in a higher net tax payable for individuals with special rate incomes.

These examples highlight the significant impact of the recent changes on the tax liability of taxpayers with special rate incomes. The exclusion of special rate incomes from the rebate calculation under Section 87A post-5th July 2024 update has increased the tax burden for many taxpayers.

Visit www.cagurujiclasses.com for practical courses