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Our hon’ble FM Smt. Nirmala Sitharaman has given all of us a reason to smile, in her budget speech presentation of the Union Budget 2023, when she announced, “Currently, those with income up to Rs.5 lakh do not pay any income tax in both old and new tax regimes. I propose to increase the rebate limit to Rs.7 lakh in the new tax regime. Thus, persons in the new tax regime, with income up to Rs.7 lakh will not have to pay any tax.”
The Explanatory Memorandum to the Finance Bill 2023 provided as under:
“IV. Rebate under section 87A
Under the provisions of section 87A of the Act, an assessee, being an individual resident in India, having a total income not exceeding Rs 5 lakh, is provided a rebate of 100 per cent of the amount of income-tax payable i.e., an individual having income till Rs 5 lakh is not required to pay any income-tax. From the assessment year 2024-25 onwards, an assessee, being an individual resident in India whose income is chargeable to tax under the proposed sub-section (1A) of section 115BAC, shall now be entitled to a rebate of 100 per cent of the amount of income-tax payable on a total income not exceeding Rs 7 lakh.”
Amendment in Section 87A of the Income Tax Act by the Finance Act 2023
Before the amendment by the Finance Act 2023, section 87A read as under,
“Rebate of income-tax in case of certain individuals.
87A. An assessee, being an individual resident in India, whose total income does not exceed five hundred thousand rupees, shall be entitled to a deduction, from the amount of income-tax (as computed before allowing the deductions under this Chapter) on his total income with which he is chargeable for any assessment year, of an amount equal to hundred per cent of such income-tax or an amount of twelve thousand and five hundred rupees, whichever is less.
The Finance Act, 2023 has inserted a Proviso in section 87A of the Income Tax Act, w.e.f. 1.4.2024, namely:
“Provided that where the total income of the assessee is chargeable to tax under sub-section (1A) of section 115BAC, and the total income—
(a) does not exceed seven hundred thousand rupees, the assessee shall be entitled to a deduction from the amount of income-tax (as computed before allowing for the deductions under this Chapter) on his total income with which he is chargeable for any assessment year, of an amount equal to one hundred per cent of such income-tax or an amount of twenty-five thousand rupees, whichever is less;
(b) exceeds seven hundred thousand rupees and the income-tax payable on such total income exceeds the amount by which the total income is in excess of seven hundred thousand rupees, the assessee shall be entitled to a deduction from the amount of income-tax (as computed before allowing the deductions under this Chapter) on his total income, of an amount equal to the amount by which the income-tax payable on such total income is in excess of the amount by which the total income exceeds seven hundred thousand rupees.”
Therefore, a bare perusal of the above reproduced pre-amended as well as the amended section 87A of the Income Tax Act, by the Finance Act, 2023, makes it duly evident that a taxpayer having a total income of upto Rs 5 lakhs in the old regime and upto Rs 7 lakhs in the new regime, will get the rebate equivalent to the tax payable coming on incomes of Rs.5/7 lacs respectively, in the two regimes, and as such will not be required to pay any income tax, on such incomes.
It is important to note here that the said section 87A itself doesn’t contain any restriction or condition that the benefit of rebate under this section will not be available in case of any income of the taxpayer which is chargeable to tax at a special rate.
Some of the examples of incomes which are taxable at special rates under the Income Tax Act and which are to be entered in the Schedule SI (Special Income) of the ITR Form, are illustrated below for ready reference, viz.
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Tax on accumulated balance of recognised provident fund u/s 111 of the Income Tax Act;
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Tax on STT paid short term capital gains on equity shares/equity oriented mutual funds @ 15% u/s 111A of the Income Tax Act;
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Tax on Dividend income of NRIs @ 20% u/s 115A(1)(a)(A) of the Act;
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Tax on income of FIIs from securities under Proviso to section 115AD(1)(iii) of the Income Tax Act;
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Tax on STT paid long term capital gains taxable @ 20% with indexation u/s 112 of the Income Tax Act;
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Tax on STT paid long term capital gains on equity shares/ equity oriented mutual funds taxable @ 10% without indexation u/s 112A of the Income Tax Act.
It is pertinent to mention here that no other income, taxable at a special rate (some of which are listed above) other than the STT paid long term capital gains income on equity shares/ equity oriented mutual funds taxable at a special rate of 10% without indexation u/s 112A of the Income Tax Act, contains any restriction or condition that the benefit of rebate u/s 87A will not be available in respect of such income.
It is only sub-section (6) of section 112A of the Income Tax Act which mandates that the benefit of rebate u/s 87A of the Income Tax Act, shall not be available in case of the long-term capital gains income on equity shares or equity oriented mutual funds taxable @ 10% under the said section.
Thus, a plain reading of all the above-mentioned special income (SI) sections and the rebate section 87A of the Income Tax Act, makes it crystal clear that the benefit of rebate u/s 87A is not available, both in the old and the new regimes, only in respect of the long-term capital gains income on equity shares or equity oriented mutual funds taxable at the special rate of 10% u/s 112A of the Income Tax Act. There is no restriction or condition specified in the Income Tax Act for the non-availability of the benefit of rebate u/s 87A in respect of any other income taxable at a special rate including the short-term capital gains income on equity shares or equity oriented mutual funds taxable at the special rate of 15% u/s 111A of the Income Tax Act.
There was no confusion of any sort in this regard till the 5th July, 2024, and the return filing utilities in the e-filing portal of the Income tax department were working perfectly fine. However, w.e.f. 5.7.2024 the new income tax return filing utilities of ITR forms, have been uploaded in the Income Tax e-filing portal/website, which surprisingly, are blanketly disallowing the benefit of rebate u/s 87A to all kinds of incomes taxable at special rate, under the Schedule SI (some of which have been mentioned above). Whereas, rebate u/s 87A is not available only in respect of one special rate taxable income of long term capital gains income u/s 112A of the Income Tax Act.
Thus, the new income tax return filing utilities of the ITR forms, uploaded in the income-tax e-filing portal, w.e.f. 5.7.2024, are not allowing the benefit of rebate u/s 87A to all kinds of special incomes taxable at a special rate including the short term capital gains income on equity shares/ equity oriented mutual funds taxable at a special rate of 15% u/s 111A of the Income Tax Act.
Interestingly, theses updated ITR filing utilities are restricting such rebate benefit u/s 87A, without there being any corresponding amendments either in section 87A or any of the respective special income section of the Income Tax Act. Thus, the taxpayers although having their taxable incomes only upto Rs 5/7 lakhs respectively in the old/new regimes, are forced to pay the income tax demand on their special rate taxable incomes (other than section 112A), included in such total income, contrary to the legislative provisions and mandate of the Income Tax Act, just on account of a faulty return filing utility.
A screenshot of one such particular case, wherein the newly uploaded ITR filing utility of the income tax e-filing portal is not allowing the rebate u/s 87A of the Income tax Act, to all special incomes taxable at special rates as per Schedule SI, (in this case the short term capital gain on equity shares taxable @ 15% u/s 111A of the Income Tax Act, is being reproduced below, for ready reference of the Readers.
More surprisingly and shockingly, one Grievance Redressal screenshot of the Income tax department’s helpdesk is also being circulated in social media platforms, and which purportedly clarifies that “if your total taxable income includes special income which are chargeable to special rates of taxes is upto 7 lakhs as per new tax regime then rebate u/s 87A will be available only to the extent taxable income which is chargeable to normal rates of tax as Rebate u/s 87A(1A) is not allowed for any special rate income. So kindly proceed to file the return.”
It is pertinent to mention here that currently there is no subsection (1A) in section 87A of the Income Tax Act, as has been purportedly being referred to by the income tax department helpdesk in the above reproduced screenshot. The purported justification by the ITD helpdesk (though wrongly worded) for disallowability of Rebate u/s 87A in respect of all the special rate taxable incomes, including the short term capital gain income on equity instruments taxable @ 15% u/s 111A, if the assessee opts for the new regime, seems to be on the interpretation that the proviso inserted in section 87A w.e.f. 1.4.2024, refers only to total income of assessee chargeable to tax under section 115BAC(1A), and thus is applicable only in case of incomes chargeable to tax at normal rates.
However, in the humble understanding of the author, this interpretation lacks merit as the reference to section 115BAC(1A) in the proviso to section 87A has been made only to further the Legislative intent of the Legislature to encourage more and more taxpayers to switch to the new regime by offering them higher Rebate limit u/s 87A in the new regime. The reference to the new regime can't be interpreted to only include income chargeable to tax at normal rate. It can't be the case that in the old regime, the person is able to claim 87A Rebate in respect of all special rate taxable incomes except LTCG u/s 112A. Whereas in the new regime, he is not able to do so. If this interpretation is to hold good then the very purpose of this distinction being created by the Legislature of offering more Rebate u/s 87A in the new regime, as compared to the old regime will get defeated.
The stand to exclude all special rate taxable incomes from the purview of section 87A Rebate does have some merit but for doing that section 87A itself has to be amended in a direct manner, and by way of the Budget amendment, and not by way of changing the return filing utility. More so, there can't be two sets of return classes, for the same AY 2024-25, one before 5th July 2024 & second after 5th July 2024, the date when the utility got updated.
The said screenshot is also being reproduced for ready reference (the authenticity of the screenshot is not verifiable).
Concluding Remarks:
Therefore, from the above discussion and practical demonstration, it is duly evident and clear that the income tax return filing utilities uploaded in the e-filing portal of the income tax department w.e.f. 5.7.2024, are forcing the taxpayers to shell out wrong and incorrect income tax demands by not allowing their otherwise fully lawful claims of rebate u/s 87A of the Income Tax Act, in respect of special rate taxable incomes.
The said faulty ITR filing utilities are currently acting as if they are even above the Income Tax Act, and are not allowing the otherwise fully lawful benefit of rebate u/s 87A of the Income Tax Act, to the taxpayers, in respect of all special rate taxable incomes (entered in Schedule SI of the ITR form), whereas the legislative provisions of the Income Tax Act, as they stand now, mandate for such restriction only in respect of the long-term capital gains income on equity shares or equity oriented mutual funds taxable at the special rate of 10% u/s 112A of the Income Tax Act.
Further, the utility is calculating rebate u/s 87A in some cases even if total income is above Rs 7 lacs. For instance, if a person has salary income of Rs. 6.50 lacs and STCG income taxable at 15% of Rs. 2 lacs, thus total income of Rs. 8.50 lacs, then also the utility is allowing rebate of Rs 25,000 u/s 87A, though such person is not eligible for rebate u/s 87A, as the income has breached the threshold income limit of Rs 7 lacs. This paradox is happening because of a wrong interpretation of the reference of section 115BAC(1A) in the proviso to section 87A of the Income Tax Act. The perceived assumption is since such salary income of Rs. 6.50 lacs is taxable at normal slab rates and is within the threshold limit of Rs 7 lacs, and thus is eligible for rebate u/s 87A, under the new regime, even if the total income of Rs. 8.50 lacs including the STCG income is crossing the prescribed threshold income limit of Rs. 7 lacs.
Thus, the hon’ble FM, the Ministry of Finance, CBDT and the concerned authorities in the Income Tax department, and the Infosys team, must take immediate cognizance and consideration of this serious and grave blunder being committed in developing and uploading of such faulty ITR filing utility, and the said faulty utilities must be immediately rectified/corrected in view of the fast approaching statutorily deadline of return filing of 31.7.2024, in non-auditable cases.
[This Article has also been published in Taxmann with the citation [2024] 164 taxmann.com 370]
