Breaking News: Taxpayer Fought for Rebate under Section 87A and Won the Case; Know How?

The Income Tax Act of 1961 provides different rebates to decrease the tax burden on individual taxpayers, and Section 87A is an important provision in this regard. The most recent changes established by the Finance Act of 2023 have had a considerable impact on the implementation of this rebate, particularly under the new tax regime. Let’s go deeper into the implications and qualifying criteria.

What is Section 87A?

Section 87A of the Income Tax Act offers a tax rebate to individual taxpayers whose total income does not reach a certain threshold. This rebate directly decreases tax liabilities and is especially beneficial to lower-income households.

Eligibility Criteria for 87A Rebate Under the New Tax Regime

Typically, an individual with an income of less than Rs. 7 lakh who files an ITR under the new tax regime is eligible for a tax rebate of up to Rs. 25,000 under section 87A.

If the total taxable income of an individual is up to Rs. 7 lakh and they choose the new tax regime, they will be eligible for a rebate of:

• The amount of income tax owed on his total income or
• An amount of up to Rs. 25,000, whichever is lesser.

“In the old tax regime, a resident individual whose total income does not exceed Rs.5 lakh received a 100% income tax rebate up to a maximum of Rs.12,500,” according to the income tax department website.

Exclusions:

• The rebate does not apply to income from long-term capital gains (LTCG) from the sale of listed stock shares or equities-oriented mutual funds under Section 112A, even if the total income is less than Rs.7 lakh. Though short-term capital gains should qualify for a tax rebate.
• In some cases, Short-term capital gains are not eligible for the rebate if they are explicitly restricted during the assessment.

Case: Section 87A Rebate Under the New Tax Regime (AY 2024-25)

Let’s look at the practical application of Section 87A using a real-life case study based on an appeal filed by Beena Manishbhai Fofaria for the Assessment Year (AY) 2024-25. This case highlights fundamental challenges related to the calculation and verification of the 87A rebate, particularly where income includes capital gains.

Case Background

Taxpayer: Beena Manishbhai Fofaria

Total Income Declared: Rs.6,93,260

Income Composition:

• Long-term capital gain (LTCG): Rs.1,38,049
• Short-term capital gain (STCG): Rs.65,066

Rebate Claimed: Rs.20,010 (including STCG)

Rebate Allowed by CPC: Rs.10,250

Issue

The Centralized Processing Centre (CPC) in Bengaluru, while processing the return under Section 143(1), limited the rebate to Rs.10,250. This exclusion was primarily owing to the CPC’s judgment that short-term capital gains are not eligible for the refund, which the appellant challenged.

Arguments Presented before Authority

The appellant stated that taxpayers having a total income of up to Rs.7,00,000 are eligible for a rebate of up to Rs.25,000 under Section 87A of the Finance Act of 2023.

Section 112A states that long-term capital gains on equity shares are not eligible for the rebate. However, short-term capital gains should be considered for the rebate calculation.

The decision of CPC did not include a detailed explanation or an opportunity for the appellant to clarify, which violated natural justice principles.

Decision of Appellate Authority

The appellate authority examined the facts and stated the following:

The CPC’s restriction was considered improper because it omitted STCG from the rebate calculation without providing adequate explanation.

The case has been sent back to the Jurisdictional Assessing Officer (JAO) for verification. The JAO was asked to re-evaluate the claim in accordance with the Finance Act of 2023 and grant the rebate accordingly.

Importance Learnings from the Case

Maintaining accurate records and knowing legislative changes (such as those found in the Finance Act) will help you defend your case during appeals.

Different types of capital gains (LTCG and STCG) have different implications for rebate eligibility. Ensure that the right classification is used when filing the ITR.

Taxpayers can appeal CPC judgments, particularly if there is a misunderstanding or exclusion without appropriate reasons.