Chartered accountants differ on a salaried taxpayer’s eligibility for the tax rebate if her total income—including special rate income such as short-term capital gains—is over Rs 12 lakh but the salary component itself does not exceed the threshold. The income tax department ought to explicitly clarify its position on the rule, they say.
Budget 2025 has clarified that all the special rate incomes, including short-term capital gains (STCG) under Section 111A of the Income-tax Act, will not be eligible for the rebate under Section 87A from the 2025-26 financial year.
Finance minister Nirmala Sitharaman on February 1 had proposed to enhance the total income limit eligible for rebate under Section 87A from Rs 7 lakh to Rs 12 lakh under the new regime. Therefore, the rebate amount will go up from Rs 25,000 to Rs 60,000. This would mean that taxpayers with incomes of up to Rs 12 lakh will not have to pay tax.
No rebate for special rate incomes
Section 111A of the I-Ta Act deals with the taxation of STCG from the sale of listed equity shares, mutual funds that invest in equity shares and units of business trusts.
“After the updation of the income tax return-filing utility on the income tax portal in July 2024, the rebate (under Section 87A) was not extended to special incomes, which include capital gains. However, there was some confusion over it. From this budget onwards, the government has made it clear that there will be no rebate on special income,” said Naveen Wadhwa, vice-president, research and advisory division at Taxmann.
CAs seek clarity on rebate for higher total incomes
However, tax experts have different opinions on whether an individual will enjoy ‘nil’ tax on the regular salary component even if her total income exceeds the Rs 12.75-lakh limit (salary plus standard deduction), after adding the STCG portion.
Homi Mistry, partner with Deloitte India, said that such taxpayers will not get the rebate on special income but the salary portion would be eligible for the tax sop. “Budget 2025 has eliminated the issue around special rate incomes’ rebate eligibility. So, even if a taxpayer’s income constitutes only capital gains, for instance, and it does not exceed Rs 12 lakh, she will not be entitled to the Section 87A rebate,” he added.
Mayank Mohanka, founder-director, TaxAaram.com, concurred. “If your normal rate income is Rs 7 lakh and Rs 5 lakh is your special rate income such as STCG, then from financial year 2025-2026 onwards you will get rebate only up to Rs 7 lakh and not on the Rs 5 lakh of STCG. The STCG will be taxed at the rate of 20 percent,” he explained.
Mohanka gave another example. “Suppose the salary income is Rs 12 lakh and the taxpayer earns another Rs 8 lakh as STCG. So the total income is Rs 20 lakh, but there will still be a rebate as the normal rate income does not exceed the Rs 12-lakh limit,” Mohanka explained. The STCG portion will attract tax at the rate of 20 percent or the slab rate, as the case may be.
One law, different interpretations
There are chartered accountants who hold a different view when it comes to how the normal salary portion will be taxed.
Consider an individual with a salary income of Rs 12.75 lakh, and STCG of Rs 4 lakh. Will the taxpayer then be entitled for the rebate under Section 87A? Chartered accountant Nitesh Buddhadev, founder, Nimit Consultancy, said, “Your net taxable income should be lower than Rs 12.75 lakh for you to qualify for Section 87A rebate, otherwise you will not get the benefit. In this case, because the income, including STCG, is above Rs 12 lakh, Section 87A rebate will not be allowed.”
Amit Singhania, partner, Areete Law Offices, held a similar view. “Let’s say your salary is Rs 12.75 lakh and in addition, Rs 2.25 lakh is your STCG. In this case you are not eligible for the rebate. In addition, 20 percent tax will be applicable on the STCG income,” he said.
Last year, however, several taxpayers with total income beyond the Rs 7-lakh rebate limit (for 2024-25) did get the rebate. “At the time of filing returns last year, some taxpayers whose total income—regular income plus STCG—exceeded Rs 7 lakh got the tax rebate. This is because their regular income did not exceed Rs 7 lakh. They have not received tax demand notices from the Income Tax Department post processing of their returns so far. My view is that this defeats the intent of the rebate, which is to provide relief to small taxpayers,” said a tax consultant who did not wish to be named. Once the authorities realise the scope for potential misuse, they could perhaps consider plugging the loophole, feel some tax consultants.
“The legislative intent for introducing the Section 87A rebate was to help small income taxpayers. So in an ideal scenario, the 87A rebate should be available in full up to the threshold limit, regular and special rate income both inclusive. Once the total income crosses the threshold, no rebate should be extended,” Mohanka said.
To put an end to the ambiguity and differences of opinion, the I-T department needs to come up with a clarification, some CAs Moneycontrol spoke to underlined.
Source: www.moneycontrol.com
