Money
ITR utility glitch: Are assessees with income up to ₹7 lakh forced to pay tax?
Summary
- After July 5, 2024, the return filing utility in the Income Tax department's e-filing portal started calculating rebates under section 87A with errors due to an incorrect interpretation of the law
Finance minister Nirmala Sitharaman gave us a reason to smile during her presentation of the Union budget 2023 when she announced that those with income up to ₹5 lakh do not have to pay any income tax in both old and new tax regimes.
She proposed increasing the rebate limit in the new tax regime, under which persons with income up to ₹7 lakh will not have to pay any tax.
The updates to Section 87A of the Income Tax Act aimed to make taxpayers with a total taxable income of up to ₹7 lakh eligible for a rebate equivalent to their tax liability, capped at ₹25,000.
As per the existing provisions of the Income Tax Act, a rebate under section 87A is available in respect of all taxpayers' incomes taxable at normal slab rates or at special rates, except the income in the nature of long-term capital gains (LTCG) on equity instruments, which is taxable at a special rate of 10%.
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To understand the rebate benefit under section 87A, let's consider an example. In the fiscal year 2023-24, if a person earns a monthly salary of ₹40,000 along with a short-term capital gain (STCG) income of ₹1.20 lakh and a long-term capital gain (LTCG) income of ₹1 lakh from the sale of equity shares, their total taxable income would be ₹7 lakh. They would receive a rebate of ₹9,000 on their total salary income and a rebate of ₹16,000 on their STCG income under section 87A of the Income Tax Act. However, they would have to pay a tax of ₹10,000 on their LTCG income, even if their total income is up to ₹7 lakh only.
Issues with utility
After July 5, 2024, the return filing utility in the Income Tax department's e-filing portal started calculating rebates under section 87A incorrectly. This was due to an incorrect interpretation of the law. The new utility excludes all incomes taxable at special rates, including STCG income on equity instruments taxable at a special rate of 15%, while determining the threshold income limit of Rs. 7 lakh for calculating rebate under section 87A in the new regime.
As a result, the faulty return filing utility was not allowing the otherwise lawful rebate of Rs16,000 on the STCG income from equity shares. This was a consequence of the incorrect interpretation that all special rate taxable incomes should be excluded for calculating rebate under section 87A and not just the LTCG income on equity shares.
Moreover, the utility was calculating rebates under section 87A in some cases, even if total income exceeded Rs. 7 lakh. For example, if a person had a salary income of ₹6.50 lakh and STCG income taxable at 15% of ₹2 lakh, making their total income ₹8.50 lakh, the utility was still allowing a rebate of Rs. 20,000 under section 87A.
This was based on the wrong interpretation that the salary income of ₹6.50 lakh is within the threshold limit of ₹7 lakh and is eligible for rebate under section 87A, even if the total income of ₹8.50 lakh inclusive of the STCG income exceeded the prescribed threshold income limit of Rs7 lakh.
This issue needs immediate attention from minister Sitharaman, ministry of finance, CBDT, Income Tax department, and the Infosys team. The issues need to be fixed on an urgent basis especially with the statutory deadline of return filing approaching on 31 July, 2024, for non-auditable cases.
Mayank Mohanka is the founder of TaxAaram India and a partner at S.M. Mohanka & Associates.
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