Taxpayer Can Claim Section 87A Rebate Even If Income Includes LTCG, Says ITAT

A taxpayer cannot be denied a rebate under Section 87A merely because the total income includes long-term capital gains, if the overall income remains within the prescribed limit, the Income Tax Appellate Tribunal (ITAT), Surat Bench, has held.

The ruling may be useful for taxpayers who have small taxable income but also earn some long-term capital gains during the year. In many such cases, confusion arises over whether the rebate under Section 87A can still be claimed, especially when capital gains are part of the total income.

The case involved a taxpayer who had filed her income tax return under the new tax regime. She had shown a total income of Rs 4,30,020 in her return. Of this, Rs 1,30,020 came from long-term capital gains on the sale of an immovable property, which was taxed under Section 112 of the Income-tax Act, according to a recent report by Taxscan.

As her income was within the Rs 7 lakh limit, she claimed the Rs 25,000 rebate available under Section 87A to reduce her tax liability. However, while processing the return under Section 143(1), the Central Processing Centre, Bengaluru, accepted the returned income but denied the rebate.

Why The Tax Department Denied The Rebate

The tax department’s stand was that a rebate under Section 87A was not available in respect of long-term capital gains beyond Rs 1 lakh. It relied on the provisions dealing with capital gains and argued that the rebate could not be allowed in this case.

The taxpayer, however, argued that Section 87A does not completely bar a rebate where the income includes long-term capital gains taxable under Section 112. Since she had opted for the new tax regime and her total income was below Rs 7 lakh, she claimed that the rebate was rightly available to her.

The issue before the tribunal was whether the presence of long-term capital gains in the total income would automatically take away the benefit of the rebate under Section 87A.

What ITAT Said

The Surat Bench of the ITAT held that the taxpayer was entitled to claim the rebate. The tribunal observed that the relevant provision does not mean that the entire long-term capital gains amount has to be treated as the deciding factor for the denial of the rebate.

According to the tribunal, the restriction applies to the tax calculated on such capital gains and not to the entire capital gains amount itself. In other words, what matters is how the tax is computed under the law, not simply whether the taxpayer has earned long-term capital gains above Rs 1 lakh.

The tribunal noted that in this case, the taxpayer’s total income was within the eligible limit under the new tax regime. So, the tax rebate could not be taken away only on the ground that her income also had a long-term capital gains component.

Why Taxpayers Should Take Note

Section 87A matters for small taxpayers because it can bring down the final tax outgo, provided their income stays within the eligible limit. Under the new tax regime, resident individuals with income up to Rs 7 lakh are generally eligible for a rebate, subject to the conditions laid down in the law.

Many taxpayers assume that once capital gains are involved, the rebate may not be available. This order clarifies that the issue has to be examined carefully, depending on the nature of the capital gain, the applicable provision, and the way tax is computed.

Taxpayers, though, should be careful not to read this order as a one-size-fits-all relief for every capital gains case. The tax treatment can change depending on the type of capital gain, the section under which it is taxed, the income level, and the final tax calculation.

The ruling also underlines why taxpayers should check the intimation issued after return processing. Even if the return is accepted, rebate claims or tax calculations may sometimes be adjusted by the system. If a taxpayer believes the adjustment is incorrect, the matter can be challenged through the available legal route.

For salaried taxpayers and small investors, the case is a reminder that Form 16 or automated return processing should not be the only point of reference. Income from property sale, shares, mutual funds, or other assets should be reported correctly, and the rebate position should be checked before filing the return.

The case was Sarikaben Gopalbhai Polekar versus Income Tax Officer. The order was passed by the Surat Bench of the ITAT.

FAQs

1. Can Section 87A rebate be claimed if income includes long-term capital gains?

Yes, the ITAT Surat Bench held that the rebate cannot be denied merely because total income includes long-term capital gains, if the income remains within the eligible limit.

2. What was the main issue in this case?

The tax department denied the rebate because the taxpayer had long-term capital gains. The tribunal said the restriction applies to tax calculation on such gains, not automatically to the entire capital gains amount.

3. What should taxpayers check after filing their ITR?

Taxpayers should carefully check the intimation issued after return processing, as rebate claims or tax calculations may sometimes be adjusted even when the return is accepted.