The recent update to the income tax filing utility on the income tax portal, released on July 5, 2024, has caused significant concern among taxpayers and tax professionals. This update has altered the way the rebate under Section 87A is applied, specifically affecting taxpayers with short-term capital gains (STCG) despite no amendments being made to the Income Tax Act, 1961. This analysis will delve into the implications of this change and provide illustrative examples to elucidate its impact.
Key Details and Analytical Insights:
Rebate Eligibility Under Section 87A:
- As per the Union Budget 2023, under the new tax regime, individuals with a taxable income of up to Rs 7 lakh are eligible for a rebate of up to Rs 25,000 under Section 87A.
- The old utility allowed taxpayers to claim this rebate even if their income included STCG, provided the total income was below Rs 7 lakh.
- The new utility update denies this rebate to taxpayers with STCG, effectively increasing their tax liability, despite their total income being within the eligible limit.
Impact on Taxpayers:
- The change primarily impacts low-income earners who rely on the Section 87A rebate to reduce their overall tax burden.
- Taxpayers with STCG now face higher tax liabilities, as they are unable to claim the rebate, leading to a discrepancy between the intended benefits of the new tax regime and its actual implementation.
Expert Opinions:
- Tax professionals, including Mayank Mohanka, Founder Director at TaxAaram India, have noted this anomaly and urged for corrective measures. They highlight that the issue arises from the interpretation of "total taxable income" by the new utility, which excludes the rebate for incomes including STCG, contrary to the legislative intent.
Illustrative Examples:
Example 1: Resident Individual with STCG and Low Income
Ajay has the following income for the financial year:
- Salary Income: Rs 1 lakh
- Short-term Capital Gain (STCG) on shares: Rs 4 lakh
- Income from Other Sources: Rs 50,000
Calculation:
| Income Type | Amount (Rs) |
|---|---|
| Salary Income | 1,00,000 |
| STCG | 4,00,000 |
| Income from Other Sources | 50,000 |
| Total Income | 5,50,000 |
Ajay’s total income is Rs 5.5 lakh, making him eligible for the rebate under Section 87A since his income is below Rs 7 lakh. However, due to the updated utility:
- He cannot claim the rebate because his income includes STCG.
- Tax on STCG (15% on Rs 4 lakh): Rs 60,000
- Total tax liability: Rs 60,000
If Ajay had no STCG, he could have claimed the rebate, reducing his tax liability by Rs 25,000.
Example 2: Non-Resident with STCG
Suppose Ajay is a non-resident. He has:
- STCG of Rs 4 lakh
Calculation:
| Income Type | Amount (Rs) |
|---|---|
| STCG | 4,00,000 |
- STCG taxed at 15%: Rs 60,000
- No basic exemption limit applies.
- Total tax liability remains Rs 60,000 without any rebate.
Understanding Short Term Capital Gains (STCG) on Shares (Section 111A)
What are Short-Term Capital Gains?
Any profit or gain from the sale of shares held for 12 months or less is classified as short-term capital gains. Gains from listed equity shares are taxed under Section 111A at a concessional rate of 15%.
STCG Tax Rate on Shares (Section 111A)
- Concessional Tax Rate: 15% with applicable cess.
Applicable Assets and Conditions:
Assets Covered:
- Equity shares
- Units of equity-oriented mutual funds
- Units of business trust
Conditions:
- Transferred through a recognized stock exchange
- Transaction liable to securities transaction tax (STT)
- Exception: Transactions in an International Financial Service Center (IFSC) taxable at 15% even if STT is not levied.
Adjustment Against Basic Exemption Limit:
- Residents can set off STCG against any shortfall in the basic exemption limit.
- Non-residents are taxed at 15% on full STCG without any exemption.
Example Calculations:
Example 3: Indian Resident with Multiple Incomes
Mr. A (59 years old) has:
- Monthly pension: Rs 5,000
- STCG from shares: Rs 1.5 lakh
- STCG from property sale: Rs 1.3 lakh
Calculation:
| Income Type | Amount (Rs) |
|---|---|
| Monthly Pension | 60,000 |
| STCG from Shares | 1,50,000 |
| STCG from Property | 1,30,000 |
| Total Income | 3,40,000 |
- Adjust pension income and STCG from property against the basic exemption limit of Rs 2.5 lakh.
- Remaining Rs 60,000 from STCG on shares taxed at 15%: Rs 9,000 + 4% cess = Rs 9,360.
Example 4: Calculation of STCG
Mr. A purchased 1000 shares for Rs. 1,00,000 and sold them for Rs. 1,40,000, incurring Rs. 1,000 in brokerage. The STCG is calculated as follows:
| Particulars | Amount (Rs) |
|---|---|
| Full value of consideration | 1,40,000 |
| Less: Expenses for sale of shares | 1,000 |
| Net sale consideration | 1,39,000 |
| Less: Cost of acquisition of shares | 1,00,000 |
| Short-term Capital Gains (STCG) | 39,000 |
| Income tax liability on STCG (15%) | 5,850 |
Instances of STCG Covered Under Section 111A:
- Sale of equity shares through a recognized stock exchange with STT.
- Sale of units of equity-oriented mutual funds through a recognized stock exchange with STT.
- Sale of units of a business trust.
- Sale of equity shares, units of business trust, or units of equity-oriented mutual funds through an IFSC without STT.
Analytical Summary:
Impact on Taxpayer Behavior:
- The utility update discourages taxpayers with STCG from opting for the new tax regime, as the rebate under Section 87A becomes inaccessible.
- It could lead to a shift in investment strategies, with taxpayers potentially favoring long-term capital gains (LTCG) or other income sources to avoid higher tax liabilities.
Systemic Implications:
- The change highlights the importance of aligning utility updates with legislative intent to avoid discrepancies and unfair tax burdens.
- It emphasizes the need for clear communication from tax authorities to ensure taxpayers understand the changes and their implications.
Call for Rectification:
- Experts advocate for a correction to the utility to restore the rebate eligibility for taxpayers with STCG, ensuring the new tax regime's benefits are fully realized by eligible taxpayers.
- The correction would align the utility with the Income Tax Act, 1961, maintaining fairness and reducing the financial burden on low-income earners.
By merging the rebate issue with the detailed understanding of STCG under Section 111A, it is evident that the recent utility update has created confusion and needs rectification to ensure compliance with the Income Tax Act, benefiting low-income earners and maintaining fairness in the tax system.
