The Central Board of Direct Taxes (CBDT) has once again clarified that tax rebate under Section 87A will not be allowed for special-rated income, such as short-term capital gains.
Several taxpayers claimed rebate under this section on short-term capital gains in the financial year 2023-24. The Income Tax Department has rejected these claims and has issued demands to taxpayers to pay the outstanding tax.
Outstanding taxes must be paid by December 31st.
The Income Tax Department has said that such taxpayers will have to pay the outstanding tax before December 31, 2025. The CBDT issued a circular in this regard on September 19. It said, “It has been observed that in certain cases, returns have been processed and rebate has been allowed under Section 87A even in case of income on which special tax rates are applicable. In such cases, amendment will have to be made to disallow such rebate. This will require sending a demand to the taxpayers.”
If there is a delay in paying the tax, interest will also have to be paid on the tax.
The circular also states that if taxpayers delay paying taxes after demand, they will have to pay interest on the tax amount under Section 220(2). However, the Income Tax Department has decided that if the tax is deposited by December 31, 2025, the interest will be waived. From July 2024, the Income Tax Department denied tax rebate to many taxpayers whose income was less than Rs 7 lakh but had short-term capital gains. In the new income tax regime, the annual income limit for rebate under Section 87A was Rs 7 lakh.
This matter reached the High Court last year
In the financial year 2023-2024, the income limit for rebate under the new regime was ₹7 lakh, compared to ₹5 lakh under the old regime. The rebate under Section 87A would have reduced the tax liability of such taxpayers to zero. However, the system denied rebate on the short-term capital gains portion of income to taxpayers who filed their returns after July 5th. The utility was updated on July 5th. The matter then reached the Bombay High Court. In December 2024, the High Court directed the High Court to allow such taxpayers to file revised returns and reconsider their cases.
15 days time given to revise the return
Following the High Court order, the Income Tax Department gave taxpayers time from January 1 to January 15, 2025, to revise their returns. Many taxpayers revised their returns in the hope of receiving a rebate on STCG income as well. However, many of them received an intimation from the Income Tax Department in February 2025, asking them to pay the outstanding tax. Subsequently, the Union Budget 2025 clarified that from the financial year 2025-26, rebates under Section 111A will not be available on any special-rated income, including STCG.
Advice from tax experts
Chartered accountants say such taxpayers now have two options. First, they can pay the outstanding tax. Second, they can fight a legal battle. Mayank Mohanka, founder of TaxAaram.com, said, “My advice is that if the amount is small, it’s better to pay it rather than fight a legal battle. The Income Tax Department has made it clear that rebates will not be allowed.”
