ITR Filed before 5th July 2024: Why Taxpayers can recieve Income Tax Notice

The Ministry of Finance via Finance Act 2023 has amended Section 87A of the Income Tax Act, 1961 to introduce a special provision of rebate for Taxpayers opting to the New Tax Regime.

The following Proviso is inserted in Section 87A by the Finance Act, 2023, w.e.f. 1-4-2024:

“Provided that where the total income of the assessee is chargeable to tax under sub-section (1A) of section 115BAC, and the total income does not exceed seven hundred thousand rupees, the assessee shall be entitled to a deduction from the amount of income-tax (as computed before allowing for the deductions under this Chapter) on his total income with which he is chargeable for any assessment year, of an amount equal to one hundred per cent of such income-tax or an amount of twenty-five thousand rupees, whichever is less;”

As per the amendment, if the Income of the Taxpayer who has opted for the New Tax regime, does not exceed Rs. 700,000, the Taxpayer will be allowed a Rebate of Rs. 25000. This would make his Tax Liability Zero.

The Issue!

On 5th July, ITR online utility was updated, and after the update the utility stopped giving the benefit of Section 87A rebate for STCG u/s 111A and other special rate income. Before 5th July, IT Utility and Calculator were allowing 87A rebate against STCG u/s 111A and other special rate incomes other than Long Term Capital Gain (LTCG) u/s 112A where such rebate is specifically barred by Section 112A itself.

Calculation of Rebate: After 5th July 2024

For Example: Suppose the Assessee opted for a New Tax Regime and has the following Income-:

Normal Rate Income – Rs. 4,00,000

Short Term Capital Gain (STCG) U/S 111A – Rs. 2,00,000

Tax on Normal Tax Income – Rs. 5,000 (100000*5%]

Tax on STCG U/S 111A – Rs. 30,000 (200000*15%]

Now under the New Tax Regime, the Assessee would be entitled to take Rebate u/s 87A only against those income which is chargeable to tax under section 115BAC i.e. Normal Rate Income. Hence in the above example, the Assessee would be entitled to take the following Rebate u/s 87A-:

Total Tax – 35000 [5000 + 30000)

Rebate available u/s 87 A in new tax regime- 5000

Total Tax Payable after Rebate (Before Cess)- 30000

*Now we can see that even if the total income is less than 7,00,000 But Assessee still have to pay tax, as a Rebate is not available against special rates income.

Before 5th July 2024

There was no distinction by the Income Tax portal between Normal Rate Income Tax Special Rate Income, and thus Tax Payable would have been Rs. 10000 (Before Cess). (Rs. 35000 – Rs. 25000).

Now the Problem is, as per this update, the ITRs filed Before 5th July 2024 have paid short Tax and this might Invite an Income Tax Notice.

It’s High time that the taxpayers get a clarification from the Income Tax Department to resolve future litigations.