Taxpayer receiving notice from Income tax department for additional tax having new tax regime and capital gain income

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From FY 2023-24, Income tax department has made new tax regime as the default tax regime for Individual, HUF and accordingly tax calculation as per section 115BAC was default and if someone wishes to opt out of new tax regime, he needs to file Form 10IEA and also file Income tax return before due date.

There was also an amendment in Section 115BAC and 87A by Finance Act, 2023 wherein the slab rate was as under:

Rebate under section 87A was as under wherein a new proviso was added and before that be it new regime or old regime the rebate provision was same. The new proviso added is as under:

“Provided that where the total income of the assessee is chargeable to tax under sub-section (1A) of section 115BAC, and the total income—

(a) does not exceed seven hundred thousand rupees, the assessee shall be entitled to a deduction from the amount of income-tax (as computed before allowing for the deductions under this Chapter) on his total income with which he is chargeable for any assessment year, of an amount equal to one hundred per cent of such income-tax or an amount of twenty-five thousand rupees, whichever is less;

(b) exceeds seven hundred thousand rupees and the income-tax payable on such total income exceeds the amount by which the total income is in excess of seven hundred thousand rupees, the assessee 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, of an amount equal to the amount by which the income-tax payable on such total income is in excess of the amount by which the total income exceeds seven hundred thousand rupees.”

Now, first time reading this section anyone would say that this is a good initiative by government wherein they have increased the rebate amount and the income upto which rebate shall be allowed as the tax rate has also been rationalized.

The above amendment was introduced by Finance Act, 2023 and thus was in public domain from 01.02.2023, however no clarification was made till 05.07.2024 when an update was pushed in IT forms wherein while calculating rebate of taxpayers under new regime no rebate was allowed on special rate income i.e. capital gain u/s 111A, 112A etc.

Hence, the people who had filed their income tax return before 05.07.2024 did not face any issues with regard to claiming rebate under new regime and having capital gain income. However, now when such returns are getting processed they are getting processed with demand of amount equal to such capital gain/ special rate income plus interest on such tax.

Now, one school of thought which supports this new change in utility says that the law always said that this rebate of Rs.25000 under new regime will be applicable only to total income covered under section 115BAC(1A) i.e. only the income chargeable to tax at slab rates.

However, the another school of thought says that if such was the intention from beginning and since this was announced in Finance Act, 2023, why did government not include it in the initial release of ITR utility, why was it updated much later and further on 05.07.2024 it was introduced in government utility and it took another 5-7 days for the software vendors to implement the same.

Further, while reading the provision it can be seen that the intention should have been to introduce new slab for people opting for new tax regime as the earlier limit belongs to old tax regime and in the earlier rebate provision also the rebate is still available against capital gain income which is a part of total income then why such difference in new tax regime?

Now raising a demand with intimation under section 143(1) leaves people with no option but to either fight the demand or pay it, as now they don’t have to the option to even opt for old tax regime as same needs to be opted before the due date of filing u/s 139(1) of the Act.

Hence, there needs to be a clarification from Income tax department or remove the demand regarding the same as it is affecting lots of small taxpayer and they cannot afford to appeal for the same. Even the utility is still getting updated.

Guidance on above article on Income Tax by:

Naman Maloo (C.A., B.Com)
He is currently working as Partner – Direct Tax with a renowned firm in Jaipur having experience in dealing Assessments before Income Tax authority, Tax Audit, International Taxation, Tax planning for NRI, Business planning and consultation.
E-mail: naman.maloo@jainshrimal.in | LinkedIn: Naman Maloo

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