The government has initiated the process of erasing old outstanding small income tax liabilities, imposing a cap of Rs 1 lakh per taxpayer. Taxpayers are now able to review the status of their liabilities by accessing the Income Tax (I-T) portal.

As outlined by Finance Minister Nirmala Sitharaman during her interim Budget speech, the Income Tax department will revoke small outstanding direct tax liabilities amounting to Rs 25,000 or less for the period up to FY10, and Rs 10,000 or less for the financial years spanning from 2010-11 to 2014-15. Sitharaman estimated this measure to benefit approximately 1 crore taxpayers, with government officials projecting the total cancellation value to be around Rs 3,500 crore.

In a recent directive, the Central Board of Direct Taxes (CBDT) stipulated that outstanding small tax liabilities as of January 31, 2024, under the Income Tax Act, as well as the erstwhile Wealth Tax and Gift Tax Acts, would be waived subject to the Rs 1 lakh cap per taxpayer. CBDT clarified that this cap encompasses outstanding demand entries in the tax authorities' records concerning the principal tax component, as well as any interest, penalty, fee, cess, or surcharge under the three tax statutes.

Ameet Patel, tax partner at Manohar Chowdhry & Associates, highlighted that the set thresholds for each year would apply within the overall limit of Rs 1 lakh per taxpayer. Moreover, the extinguishment of liabilities does not confer entitlement to credit or refunds for the concerned taxpayers, nor does it grant immunity from pending, initiated, or potential criminal proceedings.

However, a clarification is needed regarding the treatment of interest already levied and part of the outstanding demand in the revenue authorities' records concerning the aggregate limit of Rs 1 lakh, according to Patel.

It's important to note that demands against entities obligated to deduct or collect tax at source, under Income Tax provisions relating to Tax Deducted at Source (TDS) or Tax Collected at Source (TCS), will not be extinguished, even if they fall within the prescribed limits.