1. The applicability of the Rebate under section 87A on Short-Term Capital Gain under the New Regime is a highly debatable issue for FY 2023-24 and 2024-25. While the Budget 2025 clarified that special rate incomes are excluded from the rebate, this exclusion will apply from April 1, 2025, and not with retrospective effect.
2. Section 87A tax rebate is given to taxpayers with a total income of up to Rs 5 lakh under the old tax regime (up to Rs 12,500). The taxpayers with a total income of Rs 7 lakh can claim the rebate, effectively reducing their tax liability to zero under the new regime. The total income limit has been raised to Rs 12 Lakhs for the financial year 2025-26. As a result of the tax rebate under Section 87A, the net tax liability becomes nil for these income levels.
3. Before we delve into the topic, let’s first highlight the recent events and controversies surrounding the rebate under Section 87A on special rate income, particularly Short-Term Capital Gains (STCG), within the new tax regime.
4. Until FY 2023-24, taxpayers whose total income consisted of special income, such as special rate income (including capital gains, winnings from lotteries, etc.), could claim rebates under Section 87A, provided they had no other income or their income was below the taxable limit, and their total income did not exceed the threshold limit of Rs. 5 lakhs.
5. The issue began on July 5, 2024, when the Income Tax Department modified the ITR utility software to prevent taxpayers from claiming the Section 87A tax rebate on special rate income, such as STCG. As a result, taxpayers who had opted for the new regime and filed their Income Tax Return for FY 2023-24 were unable to claim the Section 87A tax rebate on special rate income starting from July 5, 2024.
6. The situation did not improve for taxpayers who filed their ITR before July 5, 2024. The tax department began 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
7. The taxpayers approached the courts in the hope of justice. The Chamber of Tax Consultants filed a Public Interest Litigation (PIL). The Chamber of Tax Consultants argued before the Bombay High Court that the primary problem was the tax department modifying the logic of its own ITR filing utility software for FY 2023-24 midway through the assessment year.
8. Hon’ble Bombay High Court vide interim order dated 20/12/2024 directed CBDT to issue the requisite notification and extend the deadline for the revised and belated ITR filing date till 15/01/2025
9. Many taxpayers revised their ITRs and claimed the rebate under Section 87A. However, the issue has resurfaced, once again affecting small taxpayers, as they are now receiving income tax demand notices due to the denial of the Section 87A tax rebate on special rate income, such as Short-Term Capital Gains.
10. The ambiguity continues regarding whether the rebate calculation should include or exclude special rate income, such as capital gains. This has created a significant issue with the application of Section 87A, especially for taxpayers who have both regular income and capital gains.
11. The difference in tax liability when the total income is less than Rs. 7 lakhs (the prescribed limit for the rebate) but consists of income liable for a special rate of tax can be better understood with the help of the illustration below.
Illustration: Mr. Anupam has a salary income of Rs. 4,00,000 and a short-term capital gain of Rs. 3,00,000 for the financial year 2023-24. The tax liability, both with and without the rebate under Section 87A, is summarized in the table below: –
| Sl. | Particulars | With a Rebate on STCG | Without a Rebate on STCG |
| Rs. | Rs. | ||
| (a) | Salary income (Net after Std Deduction) | 4,00,000 | 4,00,000 |
| (b) | Short-Term Capital Gain | 3,00,000 | 3,00,000 |
| (c) = (a+b) | Total income | 7,00,000 | 7,00,000 |
| (d) | Tax on Salary Income: | ||
| Up to Rs. 3,00,000 | 0 | 0 | |
| 5% on Rs. 1,00,000 | 5,000 | 5,000 | |
| (e) | Tax on STCG 15% | 45,000 | 45,000 |
| (f)=(d+e) | Tax on Total Income | 50,000 | 50,000 |
| (g) | Less: Rebate U/s.87A (maximum rebate) | 25,000 | 5,000 |
| (h)=(f-g) | Tax after Rebate u/s 87A | 25,000 | 45,000 |
| (i) | Add: HEC @ 4% | 1,000 | 1,800 |
| (j)=(h+i) | Total tax liability | 26,000 | 46,800 |
As observed, there is a significant difference of Rs. 20,800/- in the tax liability if the rebate under Section 87A is denied on special rate income.
12. The question that many taxpayers, especially smaller ones, are grappling with is what steps they should take. Should they claim the rebate for FY 2024-25, given that the utility might allow them to do so, considering the decision by the Hon’ble Bombay High Court?
13. The small taxpayers who claimed the rebate for FY 2023-24 and received notices are now in a dilemma about the next course of action. Once the taxpayer gets the notice, he could either give up and pay the tax demand or fight it in court, as some of them did.
14. A Delhi-based taxpayer filed a case heard by the Commissioner of Income Tax (Appeals), Mumbai. The taxpayer filed ITR-3 for FY 2023-24 on July 27, 2024, under the new tax regime. She declared her total taxable income to be Rs 5,40,670, which included Rs 1,09,842 short-term capital gains (STCG) income. This ITR was processed on September 19, 2024.
The Centralized Processing Centre (CPC) disallowed Rs 16,422 as a Section 87A tax rebate claim on STCG income and allowed only Rs 5,917 for other incomes.
15. On an Appeal filed by this taxpayer, the CIT (A) decided, based on statistical reasons, that this taxpayer should get a Section 87A tax rebate on STCG. It was held that the rebate under Section 87A on special rates income, such as short-term capital gains, is valid. Accordingly, instructions were issued to the assessing officer (AO) to allow a rebate in the case under consideration.
16. This is a significant decision because it confirms that taxpayers having short-term capital gains (STCG) under Section 111A can claim the rebate under Section 87A if their total income is below the prescribed threshold. The order emphasizes that STCG is not subject to any rebate restrictions, as opposed to LTCG under Section 112A, which is expressly prohibited.
17. This is an appellate order by CIT(A), not a general rule for everyone.
When the Chamber of Tax Consultants filed a case in the Bombay High Court about this very issue, the court said it would not decide whether the 87A rebate is to be given or not on STCG income. The court decided it is best to let the individual issues come to court, and then, on a case-by-case basis, it will be decided by the judiciary officials.
18. The assessee to get the required 87A rebate benefit now may file an appeal before the CIT(Appeals) against their respective 143(1)/154 orders for financial years up to FY 2024-25. Unless the Income Tax Department contests this or publishes new guidance, taxpayers facing similar disallowances may need to contest their cases individually.
19. The Income Tax Department must issue a clear circular or notification clarifying its stance on Section 87A rebate applicability on special rate incomes for FY 2023-24 & 2024-25. Such clarification should reference the Bombay High Court judgment to ensure uniform compliance.
20. Disclaimer: The article is for educational purposes only.
The author may be approached at caanitabhadra@gmail.com.
Author Bio
i am also facing same problem now worried about what to do next i have filed my revised return on 15 jan 2025 by changing old regime to new regime to get additional 87A deduction now they have decline the deduction of 87A, now not able to revised the reurn since deadline is lapsed and want to change from new regime to old how should i proceed… there is demad of 13,000
Very Useful Information, as it is defined in a simple and clear manner.
Thank you Sir for your humble comment.