Section 87A of the Income Tax Act provides individual taxpayers in India with a rebate that can significantly reduce their tax liability, potentially bringing it down to zero, provided their total taxable income falls below a specified threshold. This provision aims to offer relief to low and middle-income earners.
Eligibility Criteria for Section 87A Rebate
To qualify for the rebate under Section 87A, the following conditions must be met:
Resident Individual: The taxpayer must be a resident individual. Non-resident individuals are not eligible for this rebate.
Total Taxable Income: The total taxable income, after accounting for deductions under Chapter VI-A (such as Sections 80C, 80D, etc.), should not exceed the specified limit.
Rebate Limits Under Different Tax Regimes
The rebate available under Section 87A varies depending on the tax regime chosen by the taxpayer:
Old Tax Regime: For the Financial Year (FY) 2024-25, resident individuals with a taxable income up to ₹5,00,000 are eligible for a rebate of ₹12,500. This means that if your taxable income does not exceed ₹5,00,000, your tax liability becomes nil under the old tax regime.
New Tax Regime: For the FY 2025-26 (Assessment Year 2026-27), the rebate limit under Section 87A has been increased. Resident individuals with a taxable income up to ₹12,00,000 can avail a rebate of ₹60,000. This enhancement aims to encourage taxpayers to opt for the new tax regime by providing greater tax relief.
Applicability of Section 87A on Capital Gains
The applicability of the Section 87A rebate on capital gains has been a subject of confusion and recent developments:
Special Rate Incomes: Incomes such as short-term capital gains (STCG) and long-term capital gains (LTCG) are taxed at special rates. The Income Tax Department has clarified that the Section 87A rebate is not applicable to these special rate incomes. Consequently, taxpayers with income solely from capital gains, even if below the rebate threshold, are not eligible for the rebate.
Recent Developments and Taxpayer Notices
The application of the Section 87A rebate on capital gains has been a subject of significant debate and legal scrutiny in recent times. Several developments have emerged, shedding light on the eligibility of such rebates on special rate incomes like STCG and LTCG.
ITR Utility Update and Subsequent Demand Notices
On July 5, 2024, the Income Tax Department updated its Income Tax Return (ITR) utility software to prevent taxpayers from claiming the Section 87A rebate on special rate incomes, including STCG. This change meant that from this date forward, taxpayers could no longer claim the rebate on such incomes when filing their returns. However, those who had filed their ITRs before this update and had claimed the rebate on special rate incomes began receiving tax demand notices. These notices required taxpayers to repay the rebate amounts previously claimed against their capital gains.
Legal Interpretations and Appeals
The disallowance of the Section 87A rebate on STCG has led to legal challenges. In a notable case, a taxpayer contested the tax demand, arguing that the law did not explicitly prohibit the rebate on STCG income. The Commissioner of Income Tax (Appeals) [CIT(A)] ruled in favor of the taxpayer, stating that while the rebate is explicitly disallowed on LTCG under Section 112A, no such legislative intent is evident for disallowing the rebate on STCG under Section 111A. This ruling emphasized that, in the absence of specific provisions denying the rebate on STCG, taxpayers should be entitled to claim it.
Budget Clarifications and Marginal Relief
The Union Budget for FY 2025-26 introduced significant changes to the Section 87A rebate:
Increased Rebate Limit: Under the new tax regime, the rebate is now available to individuals with taxable incomes up to ₹12 lakh, increased from the previous threshold of ₹7 lakh.
Maximum Rebate Amount: The maximum rebate under Section 87A has been increased to ₹60,000, up from the earlier limit of ₹25,000.
Marginal Relief Provision: To prevent taxpayers from facing a higher tax liability when their income slightly exceeds the rebate threshold, a marginal relief provision has been introduced. This ensures that the additional tax payable does not exceed the amount by which the income surpasses ₹12 lakh.
Implications for Taxpayers
These developments have several implications:
Tax Planning: Taxpayers should carefully consider the composition of their income, especially regarding capital gains, to determine eligibility for the Section 87A rebate. Proper tax planning can help in optimizing tax liabilities.
Responding to Notices: Those who have received tax demand notices due to the disallowance of the rebate on capital gains should consult with tax professionals. Given the recent favorable rulings, there may be grounds to contest such notices.
Staying Informed: As tax laws and interpretations evolve, staying updated on legislative changes and judicial pronouncements is crucial for effective tax compliance and planning.
Conclusion
While Section 87A provides significant tax relief to eligible taxpayers, it is crucial to understand its limitations, especially concerning incomes taxed at special rates like capital gains. The recent developments, including legal rulings and budgetary changes, highlight the importance of staying informed and seeking professional advice to navigate the complexities of tax regulations effectively.
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