Change in interpretation of Section 87A Post- July 5th 2024

The Section 87A Story : The Section 87A Mystery

The changes in the interpretation of Section 87A, particularly regarding the New Tax Regime after July 5th, 2024, have indeed caused confusion and tax demands for many taxpayers who filed their Income Tax Returns before the updated interpretation was implemented. This sudden change in the interpretation of Section 87A post-July 5th has caught many taxpayers off guard, leading to confusion and additional tax burdens. The only recourse currently available is to settle the tax demand unless the Income Tax Dept. its interpretation or offers relief.

There are many taxpayers who are filing the income tax return but are not paying any income tax to the Government Treasury. The non tax-paying population has also suddenly increased after the income tax Act which has incorporated section 87A. It may be noted that section 87A provides that the entire tax would be offered as rebate if the income doesn’t exceed Rs. 5 Lakh. Similarly, individuals /HUF are required to file the return even if they have loss in the business or under other source if they intend to have the benefit of carry forward of such loss

Main Points Change in the interpretation of Section 87A

1. Before July 5th, 2024:

The Finance Act , 2023 amended section 87A to provide marginal relief for income from 7,00,001 to Rs.7,27,777 in new regime 115BAC. above is an explanation on the amended section 87A rebate in income tax.

An assessee, being an individual resident in India, whose total income does not exceed five hundred thousand rupees, shall be entitled to a deduction, from the amount of income-tax (as computed before allowing the deductions under this Chapter) on his total income with which he is chargeable for any assessment year, of an amount equal to hundred per cent of such income-tax or an amount of twelve thousand and five hundred rupees, whichever is less.

Taxpayers who filed under the New Tax Regime and had total income (including special income like Short-Term Capital Gains up to INR 7,00,000 were eligible for a rebate of INR 25,000 U/s 87A. The interpretation was that as long as the total income didn’t exceed INR 7,00,000, the rebate applied, even if some portion of that income was taxed at special rates.

2. After July 5th, 2024:

The interpretation of Section 87A was revised. Now, the rebate is only available for income taxed at slab rates (i.e., normal income). Special income (like STCG) is excluded from this calculation. As a result:

• • If the taxpayer’s total income includes special income, such as capital gains, the rebate U/s 87A no longer applies unless the total “normal” income is below INR 7,00,000.
  • Taxpayers who claimed the rebate on special income in their pre-July 5th filings are now receiving tax demands to recover the rebate amount.

3. Impact on Filed Income Tax Returns on interpretation of Section 87A:

   • ITRs filed before July 5th and processed before July 5th received the rebate under the older interpretation.
   • Income Tax Returns filed before July 5th but processed after July 5th are facing tax demands where the rebate was applied incorrectly, according to the new interpretation.
   • Some taxpayers who exceeded INR 7,00,000 in total income but had less than INR 7,00,000 in normal income are seeing refunds due to the department applying the rebate only to normal income.

4. Effect on Taxpayers due to change of interpretation of Section 87A:

   • Many taxpayers, especially those with special income who filed their Income Tax Returns before July 15th, are now facing demands because their rebates are being disallowed under the revised interpretation.
   • Since the due date for changing the tax regime (from new to old) has passed, taxpayers cannot switch regimes to mitigate this issue.

5. Liberal Interpretation Before:

• • Before July 5th, the interpretation of Section 87A was more lenient. For instance, a taxpayer with ₹7,00,000 in salary and INR 50,00,000 in Short-Term Capital Gains could claim the ₹25,000 rebate, even though their gross total income was ₹57,00,000. After July 5th, this is no longer allowed.
  • Many taxpayers initially filed their returns with the understanding that they could claim the Section 87A rebate on total income, including special rate income like short-term capital gains, under the new tax regime. But, in July 2024, the government changed the utility, disallowing the rebate on special rate incomes under the new regime.
  • Special incomes from gambling winnings, online gaming wins, virtual digital assets (VDA), betting wins, or game show wins are not eligible for tax rebates under Section 87A of the new tax regime. A flat tax rate of 30% is applicable on the income, along with an additional surcharge and cess.

Next Steps to be taken by an Taxpayers: How to Handle the Demand:

• Taxpayers who receive such notices can check their intimation under Section 143(1) on the Income Tax e-filing portal. If the demand is valid and matches the post-July interpretation, they will have to pay the tax. Unfortunately, since the window to revise ITRs and switch back to the old regime has passed, taxpayers cannot opt for the old regime to claim deductions and exemptions.

• • Pay the Tax Demand: Taxpayers are now required to pay the tax demand resulting from the disallowed rebate. To do so, follow these steps:

• • Navigate to e-File -> e-Pay Tax -> New Payment.
  • Select the relevant Demand Reference Number from the “Demand Payment as Regular Assessment Tax” tile.
  • Alternatively, go to Pending Actions -> Response to Outstanding Demand and click on the “Pay Now” option.

Important: Use the minor head code ‘400’ for demand payments.

• Submit Response to Outstanding Demand: After making the payment, don’t forget to submit a response with the challan payment details under the “Response to Outstanding Demand” section.

In Summary :

Till 5th July if the ITR filed under new tax regime then rebate of Rs.25,000 is available if Total Income including special income is up to Rs.7,00,000 However From 5th July onward the rebate u/s 87A was not available for special income in New Tax Regime. Many taxpayers feel that this change disrupts the principle of ease of doing business and complicates the filing process. The new tax regime was initially introduced to simplify taxation by offering lower rates with fewer exemptions, but this mid-year adjustment is causing confusion and unexpected financial burdens.