1. The Surprise Element: Peculiar things never cease to happen in the world of taxation, and the Income Tax Department often finds innovative ways to surprise taxpayers.
Interestingly, this time the surprise is wrapped in a CBDT Circular dated 19th September 2025, which declares that interest will be waived on certain tax demands — specifically those resulting from the incorrect denial or adjustment of rebate under Section 87A.
2. The Unexpected Twist: What’s peculiar, however, is that such tax demand notices are sent to taxpayers whose returns have already been processed and who have had every reason to believe their tax matters were settled for the year.
3. The Backstory: To understand this small tax-time drama, let’s rewind a bit. The Section 87A tax rebate is available to taxpayers with a total income of up to Rs 5 lakh under the old tax regime (up to Rs 12,500). Taxpayers with a total income of Rs 7 lakh can claim the rebate, effectively bringing their tax liability to zero under the new regime.
The issue started on July 5, 2024, when the Income Tax Department updated the ITR utility software to prevent taxpayers from claiming the Section 87A tax rebate on special rate income, such as STCG. Consequently, those filing under the new regime after 5th July 2024 were unable to claim the rebate under Section 87A on such income.
The situation did not improve for taxpayers who filed their ITR before July 5, 2024. The tax department started sending defective notices under Section 139(9) to those taxpayers who had filed their returns before July 5 and claimed the rebate under Section 87A. The taxpayers approached the courts in the hope of justice. The Chamber of Tax Consultants filed a Public Interest Litigation (PIL). Honourable Bombay High Court, via an interim order dated 20/12/2024, directed CBDT to issue the necessary notification and extend the deadline for the revised and belated ITR filing date until 15/01/2025. Many taxpayers revised their ITRs and claimed the rebate under Section 87A.
After the judgment of the Bombay High Court restricting 87A claims in ITR and several lower court judgments permitting 87A, relief was expected from the income tax department. However, by issuing the recent CBDT Circular No. 13/2025 dated 11 September 2025, the department makes it clear that litigation on 87A is likely to increase. It has added another dimension to the ongoing debate around the rebate under Section 87A.
4. Key Points from the CBDT Circular: The main points of CBDT Circular No. 13 dated 13.09.2025 are as follows:-
4.1 Special rate income excluded: Incomes taxed at special rates are excluded while computing total income under Section 115BAC(1A). Hence, the Section 87A rebate is not permissible in such cases.
4.2 Rectification required: Cases where a rebate under 87A was mistakenly granted will be corrected.
4.3 Demand notices likely: Taxpayers who previously received refunds or “processed successfully” messages may now face fresh tax demands reversing those rebates.
4.4 Interest waiver: If such tax demand is paid by 31st December 2025, interest under Section 220(2) will be waived. Any delay beyond that date will incur interest.
4.5 Purpose: The circular aims to ensure fairness by waiving interest while complying with legal requirements.
5. Action Points for Affected Taxpayers: The taxpayer receiving such notice can contest the matter by filing an appeal with the Commissioner of Income-tax (Appeals).Taxpayers can also continue defending their case by citing favourable ITAT decisions.
It is well established that CBDT circulars bind taxation authorities and not taxpayers. A circular cannot impose a higher burden than what the Income-tax Act itself, on a true interpretation, envisages.
6. Broader Implications: The circular establishes administrative finality by affirming that the 87A rebate is not allowed when there is special rate income under the new regime specified in section 115BAC(IA). While this will result in corrections and extra tax demands, the interest waiver until 31 Dec 2025 provides a sense of fairness—recognising taxpayers’ genuine reliance on earlier rulings or system-generated outcomes.
7. The Bigger Picture: While this episode may once again highlight the peculiar charm of our tax systems, it also serves as a reminder — even when your ITR says “Processed,” the story may not always be over.
A taxpayer who filed the return diligently, claimed the rebate correctly, and even saw the ITR “processed successfully” hardly expects a demand notice months later. Yet here we are — learning once again that in taxation, surprises are part of the process.
8. While this episode may once again highlight the peculiar charm of our tax systems, it also serves as a reminder —even when your ITR says “Processed, ”the story might not always be over. In the end, while CBDT’s decision to waive interest on 87A-related demand is a welcome relief, it is also a reminder that technology-driven tax systems can sometimes outpace logic and fairness.
Let’s hope this kindness by the Department won’t just stop at waiving interest but will also encourage greater accuracy and consistency in future return processing — so that next time, a “processed” status truly means the end of the story.
Stay alert, stay informed, and perhaps keep a pinch of humour handy — it helps when dealing with surprises from the Tax Department!
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Disclaimer: The article is for educational purposes only.
The author can be approached at caanitabhadra@gmail.com
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