The rebate dilemma for small tax payers (for FY 2023-24 income tax returns)
- Neha Lodaya
- Jan 11
- 2 min read
Section 87A of the Income-tax Act, 1961 (‘IT Act’) provides a tax rebate to individuals whose Gross Total Income (‘GTI’) is less than INR 7 lakhs under the new tax regime. This rebate is equivalent to the lower of the actual tax payable on the GTI or INR 25,000, effectively reducing the tax burden for such individuals (referring to them as “small taxpayers”). Such rebates form part of the legislature to extend greater relief to small income groups, aligning with the Government's policy of providing fiscal support to lower income bracket assesses.
The IT Act includes a specific carve-out under Section 112A, which states that the rebate is not available to small taxpayers whose income includes Long Term Capital Gains (‘LTCG’) from the sale of listed shares or securities. Such LTCG is subject to taxation at special rates, (i.e., tax rate 10% on the amount exceeding INR 1 lakh as applicable for the FY 2023-24).
It is important to note that NO such carve-out exists for Short Term Capital Gains (STCG) arising from the sale of listed shares or securities, (chargeable to tax at rate of 15% for FY 2023-24). Consequently, the rebate under Section 87A applies to the tax on STCG for small taxpayers, provided their Gross Total Income (GTI) is within the specified threshold.
This treatment was consistent even under the old tax regime, where small taxpayers were eligible for a rebate on incomes under the head STCG if their GTI was less than INR 5 lakhs.
However, from July 5, 2024, the Income Tax Department updated its utility, restricting small taxpayers from claiming the rebate under Section 87A against their tax liabilities arising from STCG. This restriction sparked concerns, as it deviated from the earlier provisions allowing such rebates.
The matter was challenged before the Hon’ble Bombay High Court in the case of The Chamber of Tax Consultants vs. Director General of Income Tax (Systems) & Ors.
In response to the Court's directions, the Central Board of Direct Taxes (CBDT) extended the deadline for revising returns for the financial year 2023-24 to January 15, 2025. Additionally, the ITR utility was updated to allow small taxpayers to manually input the rebate amount under Section 87A.
This development raises a critical question: while processing these revised returns, will the Central Processing Centre (CPC) allow the rebate under Section 87A for small taxpayers, as per the earlier understanding and legislative intent? The uncertainty surrounding this issue has created unnecessary complications for small taxpayers, many of whom are unlikely to incur tax liabilities exceeding INR 25,000 and may lack access to professional guidance or the resources to engage in litigation.
Issue of clarification instead of such long lasting litigation rounds would help such small tax payers to take an informed decision.
