After an update to the tax-filing utility on the income tax portal on July 5, 2024, taxpayers are now required to forgo a potential rebate of up to Rs 25,000 under the new tax regime if they have earned short-term capital gains.
Previously, individuals with taxable incomes below Rs 7 lakh opting for the new tax regime were eligible for a rebate of Rs 25,000. The Institute of Chartered Accountants of India and the Bombay Chartered Accountants’ Society have urged the Finance Ministry to reconsider this restriction on the rebate.
According to the provisions of the Income Tax Act, the maximum rebate under section 87A is Rs. 12,500 if the total income does not exceed Rs. 5 lakhs. However, under the default tax regime prescribed in section 115BAC(1A), the maximum rebate under section 87A can go up to Rs. 25,000 for residents with total income not exceeding Rs. 7 lakh.
Experts, particularly chartered accountants, argue that this restriction contradicts the provisions of the Income Tax Act and will impact a significant number of low-income earners who are unable to claim the full rebate of Rs 25,000 under section 87A if they have earned short-term capital gains taxed at 15 per cent. They note that this change was introduced following the July 5, 2024 update of the income tax utility. Previously, individuals with gross total income below Rs 7 lakh could still claim the rebate even after earning short-term capital gains under section 111A. The only restriction for claiming the rebate was related to the long-term capital gains tax of 10 per cent under Section 112A without indexation.
The ICAI also pointed out that there is no such restriction for short-term capital gains on the transfer of equity shares, units of equity-oriented funds, and business trust (subject to STT) taxed at 15 per cent under section 111A, and this move may lead to confusion in future income tax notices.
In response to grievances about this rebate restriction, the Income-tax department helpdesk stated that the rebate is only applicable on income chargeable at normal rates, not on income tax chargeable at special rates. Experts dispute this response, emphasizing that only section 112A imposes such a restriction, not sections 111A or 112.
Additionally, it is highlighted that tax under sections 111A and 112 is levied on the entire capital gains at 15 per cent and 20 per cent, respectively, whereas tax under section 112A is only levied on long-term capital gains over Rs. 1 lakh at 10 per cent. They argue that denying the rebate under section 87A for capital gains falling under sections 111A and 112 would cause genuine hardship to individuals earning income from these sources and paying tax at a flat rate without any specific threshold exemption.