The Central Board of Direct Taxes (CBDT) has stated that taxpayers cannot claim tax exemption under Section 87A of the Income Tax Act on income that is taxed at special rates, including short-term capital gains (STCG).
Several taxpayers had claimed exemption on short-term capital gains in the 2023-24 financial year, but the Income Tax Department rejected their requests and demanded the outstanding taxes.
The department has now asked such taxpayers to pay their outstanding taxes by December 31, 2025. This also applies to cases where exemptions were previously granted by mistake. In its circular issued on September 19, the CBDT stated that in several cases, returns were processed incorrectly and exemptions were granted on income falling under special tax rates.
If not repaid on time, interest will have to be paid.
These errors are now being corrected and new demands are being issued. The circular also warns that any delay in payment may result in interest being charged under Section 220(2) of the Income Tax Act. However, to alleviate taxpayers’ hardship, the Income Tax Department has offered relief. It has decided to waive interest on payments of outstanding taxes due before December 31, 2025.
From July 2024, the Income Tax Department has been rejecting exemption claims on short-term capital gains under Section 87A for taxpayers with income less than ₹7 lakh. For the financial year 2023-24, these short-term capital gains were taxed at 15 percent, but from the financial year 2024-25, this rate has been increased to 20 percent.
The matter reached the High Court
The exemption limit for fiscal year 2023-24 was ₹5 lakh under the old tax regime and ₹7 lakh under the new tax regime. While this provision helped reduce tax liability to zero, the exemption did not cover income taxable at special rates, such as STCG. The matter later reached the Bombay High Court, which requested the Income Tax Department to allow taxpayers to revise their returns in December 2024.
A 15-day period was set for such amendments in January 2025, but even then, many taxpayers received notices to pay their pending dues. Finally, the Union Budget 2025 cleared all confusion by stating that special-rate income, including STCG under Section 111A, would not be eligible for exemption under Section 87A from FY 2025-26.
