Top Stories Received Income Tax Notice for claiming Section 87A Rebate on STCG? Here’s what you need to know Many taxpayers who claimed rebates under Section 87A of the Income Tax Act, 1961 in lieu of STCG have recently been hit with demand notices from the Revenue Department By Avinash Kurungot – On October 21, 2024 1:43 pm – 4 mins readBy Manu Sharma – On 1:43 pm – 4 mins read
Section 87A and Section 111A of the Income Tax Act, 1961 are key provisions that directly impact taxpayers, primarily those that have lower incomes or capital gains. While Section 87A provides a tax rebate for resident individuals whose annual income does not exceed Rs.5,00,000/- during an Assessment Year, in effect bringing their net income tax liability to zero. Comprehensive Guide of Law and Procedure for Filing of Income Tax Appeals, Click Here On the other hand, Section 111A governs Short-Term Capital Gains (STCG) arising from the sale of equity shares or equity-oriented mutual funds that are taxed at a flat rate of 15%. This article seeks to establish the correlation between Section 87A and Section 111A in light of tax rebates involving STCG.
Understanding Section 87A Section 87A of the Income Tax Act, introduced during the Financial Year (F.Y.) 2013-14 as a means of providing relief to taxpayers within the lower income brackets. While Section 87A has undergone changes over the years owing to revision of tax slabs, the current provision permits a rebate of upto Rs.12,500/- for taxpayers earning upto Rs.5,00,000/- during a Financial Year, effectively making them liable to pay zero amounts as income tax. However, a recent phenomenon sees taxpayers who have claimed tax rebates with relation to STCG under Section 111A of the Act issued with Demand Notices by the Department citing erroneous claim of rebate. Old Tax Regime vs New Tax Regime The Indian Tax System has undergone multiple changes in recent years, with the most significant and lasting change being the Introduction of the New Tax Regime,first proposed in Union Budget 2020–21. Taxpayers now have the liberty to choose between the Old Regime which offers various kinds of deductions and exemptions as opposed to the New Regime that have lower tax rates but fewer available deductions. Comprehensive Guide of Law and Procedure for Filing of Income Tax Appeals, Click Here
The rebate under Section 87A has remained constant through the change of tax regimes, with the issue arising when taxpayers earn STCG under Section 111A which are statutorily taxable at a flat rate of 15%. Numerous taxpayers who fall within the category under Section 87A have claimed Rebate despite earning STCG, leading to discrepancies between the expected tax liabilities and the demands raised therein. Why the Recent Tax Demand Notices? Numerous taxpayers who have claimed rebates under Section 87A while filing their Income Tax Returns (ITRs) while declaring gains from STCGs have recently been issued tax demand notices by the Revenue Department. The issue arises in the paradoxical proposition between the concerned provisions. While Section 87A offers rebates for incomes up to Rs.5,00,000/-, Section 111A taxes STCG at a flat rate of 15%.
It has been seen through numerous instances that taxpayers who have claimed such rebates are being demanded to pay additional taxes, often in amounts significantly different from their estimated tax liability. Legality, PIL Before Gujarat High Court While the legal position of such taxability has not been firmly laid down, the same has presently been challenged by means of a Public Interest Litigation (PIL) before the Gujarat High Court. The PIL has been lodged by a Chartered Accountant (CA) seeking redressal of the concerns raised by innumerous taxpayers affected by the disallowance of the rebate, while contending that the convoluted interpretation of the law prejudices small-time taxpayers. Read More: S. 87A Rebate Denial under Challenge before Gujarat HC in PIL [Read Petition] The referenced PIL is hailed as a significant step in potentially changing the applicability of the rebate in similar cases. The ruling, currently lis pendens before the Gujarat High Court could offer much needed clarity on the permissibility of Section 87A rebate claim by taxpayers who have STCG. Who Are Affected? The disallowance of the rebate under Section 87A primarily affects taxpayers in the middle-income group, with their incomes around the Rs.5,00,000/- threshold.
Taxpayers including salaried individuals, freelancers and small-time traders with marginal earnings are finding themselves at the receiving end of tax demand notices. Comprehensive Guide of Law and Procedure for Filing of Income Tax Appeals, Click Here Taxpayers have considered the flat 15% tax rate on STCG under Section 111A and self-determined their net taxable income below the Rs.5,00,000/- threshold, only to be met with additional tax demands. What Lies Ahead? The PIL before the Gujarat High Court is a step in the right direction to clear the air regarding the tax liabilities surrounding rebates and STCG under Section 87A and Section 111A of the Income Tax Act, 1961.
No doubt, taxpayers should exercise added caution while filing their ITRs and tax professionals who render services should be on their toes, keeping up to date with any rulings or clarifications from the courts regarding the applicability of Section 87A to STCGs. If you are someone who has received a Demand Notice, make sure to consult a tax professional and contest the matter before legal forums if needed. Draft Format Access the Draft Format of Letter in Response to Demand Notice and Clarification on Rebate u/s 87A Applicability