Under Section 87A of the Income-tax Act 1961, taxpayers with a total income up to Rs 5 lakh under the old tax regime or up to Rs 7 lakh under the new tax regime are eligible for a tax rebate that can reduce their net payable tax to nil.
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A recent update to the income tax filing utility has left many taxpayers in a bind, forcing them to forego a valid tax rebate of up to Rs 25,000 under the new tax regime. This issue, arising from an error in the utility, contradicts the Income Tax Act, 1961, and is creating confusion and financial strain for low-income earners.
Under Section 87A of the Income-tax Act 1961, taxpayers with a total income up to Rs 5 lakh under the old tax regime or up to Rs 7 lakh under the new tax regime are eligible for a tax rebate that can reduce their net payable tax to nil. However, after the update on July 5, 2024, taxpayers with special rate incomes, like short-term capital gains (STCG) on equity shares taxed at 15%, have been denied this rebate.
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A rebate is a waiver on income tax meant to help low-income earners reduce their tax burden. The Union Budget 2023 allows individuals under the new tax regime to claim a rebate of up to Rs 25,000 if their taxable income is below Rs 7 lakh.
The recent utility update, however, misinterprets “total taxable income,” leading to incorrect tax computations.
Say for example there is Shubham with a salary income of Rs 5 lakh and Rs 2 lakh worth of STCG on equity shares, a total Rs 7 lakh.
Before July 5, Arun could claim the full rebate on his entire income. Now, the utility only allows a rebate on his salary income, ignoring the STCG, thereby increasing his tax liability.
On the other hand, Mehak, with Rs 6.5 lakh of salary and Rs 3 lakh in STCG, totaling Rs 9.5 lakh, shouldn’t get a rebate as her total income exceeds Rs 7 lakh. Yet, the faulty utility allows her a rebate based on her salary alone, which is within the Rs 7 lakh limit, leading to a wrongful rebate claim.
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Chartered accountants are pressing for an immediate correction. Tax experts say the utility’s flaw is forcing taxpayers with eligible incomes to pay taxes unjustly on their special rate incomes, adding that this problem will impact hundreds of low-income earners, complicating their tax filings and financial planning.
Experts have argued for a simplified capital gains tax structure to prevent such issues. Shalini Jain from EY India and Manoj Purohit from Tax & Regulatory Services suggest streamlining classifications and unifying tax treatments for different securities. Simplifying the tax code would reduce administrative burdens and enhance compliance.
