In recent months, there has been significant confusion among taxpayers regarding Section 87A, particularly after the changes introduced on 5th July 2023. With more than 3 crore taxpayers having already filed their ITRs, many are now facing unexpected tax demands. Let’s dive into the details to understand what has changed and how it impacts your tax filings under the new tax regime.
What is Section 87A?
Section 87A offers a tax rebate to individual taxpayers, making them eligible for a reduction of up to ₹25,000 from their total tax liability if their total income doesn’t exceed ₹7,00,000. This rebate was available for both regular income and special income (such as Short-Term Capital Gains or STCG) under the new tax regime until 5th July 2023.
What Changed After 5th July 2023?
As of 5th July 2023, the interpretation of Section 87A was altered, affecting how special income is treated under the new tax regime. Earlier, the rebate of ₹25,000 was available for total income up to ₹7,00,000, inclusive of special income like STCG. However, after 5th July, special income no longer qualifies for this rebate.
Effect of the Change:
- ITRs Filed Before 5th July: Taxpayers who filed their returns before this date and whose returns were processed early enjoyed the rebate on special income.
- ITRs Filed Before 5th July but Processed Later: Many taxpayers who filed returns before this change but were processed later are now seeing tax demands. This is because the rebate on special income is no longer applicable.
- Confusion with Refunds: In some cases, where total income (normal + special) exceeded ₹7,00,000 but regular income was below this threshold, taxpayers are receiving refunds, as the department is considering only regular income for the ₹7,00,000 limit.
As a result, a large number of taxpayers are now receiving tax demands for the rebate they claimed on special income. Given that the filing deadline under Section 139(1) has already passed, taxpayers cannot switch back to the old tax regime, leaving them with limited options.
The Scale of the Issue
By 15th July, over 1.5 crore taxpayers had already filed their returns, with many claiming the rebate under Section 87A. By the time software updates reflecting the new interpretation were rolled out on 15th July, nearly 3 crore returns had been filed, affecting a large number of taxpayers with special income who had claimed the rebate.
One of the more startling outcomes has been cases where taxpayers, with total incomes exceeding ₹7,00,000 (including special income), still received a rebate due to the old interpretation. This liberal interpretation of Section 87A allowed taxpayers with gross income as high as ₹57,00,000 (e.g., salary of ₹7,00,000 and STCG of ₹50,00,000) to receive the ₹25,000 rebate.
What Next for Affected Taxpayers?
With the filing deadline behind us, taxpayers are left with little recourse. The only viable option for those who claimed the rebate under the old interpretation is to pay the outstanding tax demand unless the tax department revises its interpretation of Section 87A.
How to Pay the Tax Demand:
- Log into your e-filing account.
- Navigate to: e-File -> e-Pay Tax -> New Payment
- Select the appropriate DRN (Demand Reference Number) under the ‘Demand Payment as Regular Assessment Tax’ tile.
- Alternatively, go to Pending Actions -> Response to Outstanding Demand and click on ‘Pay Now.’
- Ensure that you use minor head code ‘400’ for any outstanding demand payment.
After payment, don’t forget to update the tax department with your payment details through the ‘Response to Outstanding Demand’ section using the challan information.
Conclusion: The 87A Mystery
The sudden change in the interpretation of Section 87A has left many taxpayers in a bind, with unexpected tax demands. While the liberal interpretation provided relief to some, the stricter post-July interpretation has resulted in confusion and added financial burdens for others. The only solution for now is to comply with the tax demands unless the tax authorities revisit their stance on the matter.
Stay tuned for further updates on this issue as the debate around Section 87A continues.