No income tax rebate u/s 87A despite total income below Rs 7 lakh in these cases

Sep 3, 2024

Synopsis
No tax rebate is given if you have long term capital gains (LTCG). However, in some situations even if you filed your ITR carefully and claimed the right deductions still section 87A tax rebate can be denied to you. Read below to know why is this so and when is tax rebate under section 87A given.

Even if your total income is below Rs 7 lakh no tax rebate u/s 87A will be given in case this happensGetty ImagesEven if your total income is below Rs 7 lakh no tax rebate u/s 87A will be given in case this happens

The deadline to file income tax returns for individuals not subject to a tax audit was July 31, 2024, for the financial year 2023-24 (assessment year 2024-25). If you filed your ITR by the deadline, you might be waiting for it to be processed. However, there is a chance it won't be processed according to your calculations. Also do keep in mind that if you missed the filing deadline, you could only file under the new tax regime.

You can choose the old tax regime only if ITR is filed within the deadline

You might have filed your income tax return (ITR) under the old tax regime, but the tax department may have calculated your tax according to the new tax regime. The intimation order under section 143(1) will reflect this new calculation, as per the clarification from the income tax department. Explaining how this may happen, the income tax department said, "It may be appreciated that the new tax regime is the default regime from AY 2024-25 onwards. The option to opt out of the new tax regime can be exercised by filing the return of income with the selection of 'Opt-out' option on or before 31.07. 2024 which is the due date for filing return u/s 139(1) of the Act."

Explaining what the tax department meant by the above clarification, Yogesh Kale, Executive Director, Nangia Andersen India says that ITRs could only be filed under the old tax regime if it's filed within the deadline. "In other words, the option to opt out of the new tax regime can be exercised only by filing an ITR within the due date. Once the original ITR is filed within the due date, then a revised ITR can be filed choosing a different tax regime vis-à-vis the original tax return. However, once this due date has elapsed, belated returns can be filed only under the new tax regime," says Kale.

How 87A rebate works and when it is not applied

Usually, an individual having income less than Rs 7 lakh and filing ITR under the new tax regime is eligible for tax rebate under section 87A up to Rs 25,000. The maximum rebate under section 87A is Rs 12,500 for the old tax regime.

According to CA Swapnil Patni, Founder of SPC Edutech, "If an individual's total taxable income is up to Rs 7 lakh and chooses the new tax regime, they will be eligible for rebate of

An amount of income tax payable on his total income or

An amount up to Rs 25,000 whichever is lower."

"In the old tax regime in case of a resident individual, whose total income does not exceed Rs 5 lakh there is rebate of 100 percent of income tax subject to a maximum of Rs 12,500," according to the income tax department website.

When this tax rebate under section 87A is applied, an individual's tax liability becomes nil, but experts say it is not given in certain exceptional circumstances.

Rebate not available for LTCG income even if total income below Rs 7 lakh "However, there is an exception to this. In case the total income of an individual includes long term capital gains from the sale of listed equity shares or equity oriented mutual funds, then such tax on such capital gain is not eligible for section 87A rebate. Moreover, section 87A tax rebate is not available to non-residents," says Kale.

Mihir Tanna, Associate Director- direct tax, S.K Patodia & Associates LLP, a CA firm explains the concept with an example. Say you have a salary income of Rs 4.5 lakh and LTCG income from equity shares of Rs 1.5 lakh in FY 2024. So, you will get a tax rebate for Rs 4.5 lakh income, but not for Rs 50,000 (LTCG income up to Rs 1 lakh was not taxable in FY 2024. Budget 2024 Presented in July 2024 increased this to Rs 1.25 lakh for equity shares sold from July 23, 2024). Therefore, Rs 50,000 LTCG amount would attract 10% tax (old rate) which is Rs 5,000. There is no section 87 rebate for this income, though total income of Rs 5 lakh is typically eligible for rebate under section 87A under the old tax regime.

Moreover, special rate incomes like speculative income, virtual digital asset (VDA), etc are not eligible for section 87A tax rebate.

Short-term capital gain eligible for 87a rebate?

Experts say that tax rebate is available for short-term capital gains. "The Income-tax Act, 1961 provides (section 112A) that rebate under section 87A would not be available against tax on long term capital gain from sale of listed shares or units of equity oriented mutual funds. However, it is not explicitly mentioned that you can't get tax rebate under section 87A on short term capital gains on sale of listed shares or units of equity oriented mutual funds. So, on STCG you should get 87A benefit," says Kale.

You may lose out on 87A tax rebate benefits if you file ITR after the deadline even if total income is below Rs 7 lakh

Kale says that if, for any reason, your total income is below Rs 5 lakh and you file ITR under the old tax regime, you are eligible for the 87A tax rebate. However, if this ITR is not verified or not submitted before the deadline, you need to file a belated ITR where you can't choose the old tax regime.

Kale explains with an example: Suppose your gross income is Rs 8 lakh and total income after factoring all deductions is Rs 4,99,000. So, you are eligible for a tax rebate under the old tax regime. However, if you are filing a belated ITR, your income needs to be Rs 7 lakh or below to become eligible for tax rebate under section 87A. If you can claim enough deductions to make your income below Rs 7 lakh from Rs 8 lakh, then you can claim the tax rebate. If you can't do this, you won't get the tax rebate.

However, one must remember that very few deductions are available under the new tax regime. Hence, most such taxpayers may lose the section 87a rebate due to higher net taxable income under the new tax regime. According to the income tax department, "The deductions under Chapter VI-A are allowable only if the taxpayer is eligible to offer tax under the old tax regime. Under the new tax regime, no deductions under Chapter VI-A are allowable. Please note that to opt out of the new tax regime, the taxpayer must make the necessary selection in the ITR form and file such form within the due date for the purpose of section 139(1) i.e. 31.07.2024.

[The Economic Times]