When Tax Rules Surprise You –
The Taxman Isn’t Always Asking for More!
Query 1]
My income during the year from salary was ₹11,72,190/-, Interest & Other Income was of ₹55,247/-, Short Term Capital Gain (STCG) on shares taxable at 20% was of ₹4,14,626/-. As such, my income is exceeding ₹12 Lakh and so my income was taxable. I have paid the tax due thereon. However, CPC, while processing the return, has given me the rebate under section 87A and processed the return with refund due. The refund amount is also received in my account. Is there any error in processing the return? Should I refund the amount received in my bank account? [kir*********@gmail.com]
Reply:
Don’t panic if the Income Tax Department has suddenly become generous! Sometimes, what looks like a “windfall” is actually the correct application of the law. Before rushing to return the refund, it is worth understanding why it may have been granted.
In your case, your income consists of:
- Salary: ₹ 11,72,190/-
- Interest and other income: ₹ 55,247/-
- Short-Term Capital Gain (STCG): ₹ 4,14,626/-
Thus, your total income is ₹16,42,063/-.
At first glance, it appears that since the total income exceeds ₹ 12 lakh, the rebate under section 87A should not be available. However, the law does not work merely by looking at the total income.
Under the new tax regime, the enhanced rebate under section 87A is available where the total income chargeable at the normal slab rates does not exceed ₹12 lakh. The rebate, however, is not available against tax payable on income chargeable at special rates. In your case:
- Normal income (Salary + Interest) = ₹11,52,437/- (After Standard Deduction of ₹75,000/-)
- Income taxable at special rate (STCG) = ₹ 4,14,626/-
Since your normal income is below ₹12 lakh, you are entitled to claim the rebate under section 87A against the tax payable on your normal income. The rebate, however, cannot be adjusted against the tax payable on the STCG, which continues to be taxable at a special rate of 20% for shares sold through stock exchange. Accordingly, if while filing the return you inadvertently paid tax on both the normal income and the capital gain without claiming the benefit of section 87A, the CPC would rightly grant the rebate during processing and issue the consequential refund.
Should you return the refund?
No, not merely because the refund has been credited to your account.
If the return has been processed correctly in accordance with the law, there is no need to voluntarily return the refund merely because it has been credited to your account.
Of course, this reply assumes that the assessee is a resident individual who has opted for the new tax regime.
The TAX Talk:
A refund from the Income Tax Department is like an unexpected gift. Enjoy it—but only after checking the gift tag [the section 143(1) intimation]!
Query 2]
My son is an NRI living in the USA. During FY 2025-26, he received dividend of Rs 88,000/- from Indian companies and NRO interest of Rs 20,000/-. Will he have to pay any tax? [vasant.a.deshmukh@gmail.com]
Reply:
Many NRIs believe that once they leave India, the Income Tax Department also waves them a goodbye. Unfortunately, the tax department is not so emotional! If income arises in India, it may still be taxable here.
In your son’s case, the Indian income during FY 2025-26 is:
- Dividend from Indian companies:₹88,000
• Interest on NRO account:₹20,000
• Total: ₹1,08,000
At first glance, one may think that since ₹1.08 lakh is below the basic exemption limit, there should be no tax. But here comes the small tax twist!
Dividend Income:
Dividend received by a non-resident from an Indian company is taxable under the special provisions of section 115A at 20%, plus applicable surcharge and Health & Education Cess. Thus, on ₹88,000 dividend, the basic tax would be ₹17,600 and, after 4% cess, approximately ₹18,304.
NRO Interest:
The ₹20,000 NRO interest stands on a different footing. It is ordinarily taxable as normal income. Since, on the facts given, this is the only normal-rate income and the amount is below the applicable basic exemption limit, no additional final tax should arise on the NRO Interest.
For a US-resident NRI, the India-USA DTAA may also be relevant. Interestingly, in this case the domestic rate of 20% on dividend is more beneficial than the treaty rate generally applicable to an individual, so the lower domestic rate would ordinarily apply.
What about TDS?
This is where the story becomes interesting. Banks generally deduct TDS on NRO interest at the applicable rate for non-residents. Therefore, although the final tax on ₹20,000 interest may be nil, tax may already have been deducted. TDS would also ordinarily be deducted on the dividend.
Thus, TDS and final tax liability are not necessarily the same thing. The tax deducted may be more than the tax ultimately payable.
Should he file an Income Tax Return?
In this case, filing an Indian ITR would generally be advisable, particularly if TDS has been done on the NRO interest. The return would enable him to correctly report both incomes and claim a refund of any excess TDS.
The special return-filing relaxation available under section 115A should also not be casually relied upon here, since the son’s income is not confined only to the specified income covered by that provision.
Of course, this answer assumes that he is a Non-Resident for Indian tax purposes, has no other Indian income and is not covered by any other mandatory return-filing condition.
The TAX Talk:
For an NRI, earning just ₹1.08 lakh in India does not automatically mean “no tax”! In taxation, sometimes the amount of income matters—and sometimes the nature of income matters even more.
[Views expressed are the personal views of the author. Readers are advised to seek professional advice before taking any decisions. Readers may forward their feedback & queries at nareshjakhotia@gmail.com. Other articles & response to queries are available at www.theTAXtalk.com]
