Rebate under Section 87A on Special Income under New Tax Regime

Recently, a controversy is going on regarding the allowability of rebate under Section 87A on special income like short-term capital gains on shares of listed companies under the new tax regime from A.Y. 2024–25, resulting in the issuance of demand notices to a large number of small taxpayers.

A Chartered Accountant, CA Kushal Fofaria, shared details of his own case (his mother’s case), where rebate u/s. 87A was not allowed by the department under the new tax regime on capital gain on shares, against which he filed an appeal before the first appellate authority [CIT(A)]. The CIT(A) after thoroughly going through his submissions, allowed the appeal holding that rebate u/s. 87A is allowable on total income (including special income like capital gain) under the new tax regime.

In his Linkedin post, he said, “Though I was expecting an unfavorable order from CIT(A) so as to represent the case before ITAT and set a binding precedent, a favourable order from CIT(A) sets the stage for other assessees to file an appeal, get their demands deleted and avail the rebate in the succeeding years under the new tax regime till the time the department brings in a specific amendment in the law.”

The appellate authority has passed a favourable judgement in his mother’s case.

What is Section 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. In the Old tax regime, the highest rebate under Section 87A was Rs.12,500.

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.

When this tax refund under section 87A is applied, an individual’s tax liability is eliminated, however, experts believe it is not granted in some exceptional cases.

Long-term capital gains from the sale of listed stock shares or equities-oriented mutual funds are not eligible for a rebate, even if the total income is less than Rs.7 lakh.

Furthermore, non-residents are ineligible for the section 87A tax rebate, according to an expert. In addition, special rate incomes such as speculative income and virtual digital assets (VDAs) are not eligible for the section 87A tax rebate.

Though short-term capital gains should qualify for a tax rebate.

“The Income-tax Act of 1961 (section 112A) states that a rebate under section 87A is not receivable against tax on long-term capital gains from the sale of listed shares or units of equity-oriented mutual funds. However, it is not specifically stated that you cannot receive a tax rebate under section 87A on short-term capital gains from the sale of listed shares or equity-oriented mutual fund units. So, on STCG, you should get the 87A benefit,” explains the expert.

However, Income Tax Utility is not allowing Section 87A rebate against STCG u/s 111A and other special rate incomes.

He shared the order of CIT(A) of his mother’s case consisting of his written submissions which may be helpful to other assessees to represent their case before CIT(A).

In a significant development on allowability of S.87A rebate on special income in new tax regime, CIT(A) has passed a favourable judgement in my mother’s case. Hope this may help other assessees as well.

Pls check out: https://t.co/TvBSZRXVrf#incometax #incometaxindia #87a pic.twitter.com/UftX0cMPn4

— CA Kushal Fofaria (@CAKushalFofaria) November 23, 2024

Link of CA Kushal Fofaria Linkedin Post for Full Order