After a recent update to the income tax return (ITR) filing utility on the Income Tax Department’s portal, taxpayers are reportedly unable to claim a rebate of up to Rs 25,000 under the New Tax Regime if they have reported short-term capital gains.

This change seems to conflict with the provisions of the Income Tax Act, 1961. Tax experts have observed that many taxpayers have been denied tax rebate under Section 87A if they opted for the new regime.

Section 87A of the Income Tax Act provides a rebate to help reduce the tax liability of residents. This rebate is available to individuals under two regimes:

• Old Tax Regime: For incomes up to Rs 5 lakhs, the rebate effectively nullifies the tax liability.
• New Tax Regime: For incomes up to Rs 7 lakhs, the rebate amount is increased to Rs 25,000.

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The Economic Times reported Anand Bathiya, President of the Bombay Chartered Accountants’ Society (BCAS) as saying that the updated income tax return (ITR) filing utilities have stopped allowing the rebate under Section 87A for special rate incomes, including short-term capital gains on equity shares or equity-oriented mutual funds taxable at 15% under Section 111A.

This update means taxpayers with total incomes up to Rs 5 lakh or Rs 7 lakh under the old or new regimes, respectively, are now forced to pay income tax on their special rate taxable incomes.

This goes against legislative provisions of the Income Tax Act, 1961. The BCAS has made a representation to the Finance Minister, highlighting this issue and calling for a resolution.

According to BCAS, Short-term capital gains (STCG) are taxed at a special rate of 15%, while long-term capital gains (LTCG) from selling equity shares and mutual funds are taxed at 10% for gains exceeding Rs 1 lakh.

Section 112A (6) states that the rebate under Section 87A is not available for Long-term Capital Gains (LTCG). However, this restriction does not apply to STCG, meaning taxpayers should still be eligible for the rebate on short-term capital gains.

Reason Behind the Issue

The Economic Times reported CA Hardik Kakadiya, President of the Chartered Accountants Association in Surat as saying that the problem lies in how the tax law is being interpreted by the updated software.

The phrase “Notwithstanding anything contained in this Act but subject to the provisions of this Chapter” in Section 115 BAC (1A) has been misinterpreted, causing the denial of the rebate for Short-term Capital Gains.

The BCAS has urged the Finance Ministry to fix the issues with the ITR filing utilities. The All Gujarat Federation of Tax Consultants and Income Tax Bar Association also expressed the same idea. They stressed the importance of a clear and accurate explanation of how Section 87A is applied.

Also Read: Extend Due Date for ITR Filing, Taxpayers Demand After Facing Issues with e-Filing Portal 

Call to Action

The BCAS and other tax consultant bodies have called on the Finance Ministry to:

1. Correct the ITR filing utilities to align with the provisions of the Income Tax Act.
2. Issue a clear clarification to prevent further confusion among taxpayers and tax professionals.
3. Ensure that income tax returns are processed according to the intended laws, allowing the rebate under Section 87A for all special rate incomes, including Short-term Capital Gains (STCG) under Section 111A.

These measures will help to solve the current issues and ensure that taxpayers can claim the rebates they are entitled to, thereby reducing their overall tax burden.

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