Think Differently — Controversy of rebate under section 87A a big blow to small tax payers
Section 87A of the Income-tax Act, 1961 provides rebate of income tax for resident individuals when their income is within a specified limit. Unlike deductions (which reduce your taxable income), the rebate directly wipes out tax liability — up to a prescribed maximum.
How it evolved:
- Pre-2019: Small relief for incomes up to ₹5 lakh or ₹5 lakh.
- 2019 onwards: Flat rebate of ₹12,500 for total income up to ₹5 lakh.
- Budget 2023: Under new regime, enhanced to allow zero tax up to ₹7 lakh.
- Budget 2025: Big leap — zero tax up to ₹75 lakh in the new regime for salary and pension class.
The issue of rebate of section 87A come in to High light when from July 2024 the utility of the filing return started disallowing rebate of 87 A on short term capital gain tax. The CPC issued demand under section 143 (1) of the income tax act on disallowing rebate on short term capital gain.
The CIT Mumbai in the matter of Sunita Gupta vide order dated 27/02/2025 allowed the appeal on the ground that rebate is applicable on total income including STCG also. The same order was followed by various CIT appeals in the country.
However, CIT appeals Ahmedabad took a contrary view in the matter of Jayshreeben Jayantibhai Palsana Shingala Vs ITO that rebate is not allowable on STCG. The CIT(A) relied heavily on the Memo to Finance Bill, 2025, which reiterated that while section 87A provides relief to income up to Rs. 7 lakhs under section 115BAC(1A), such rebate does not apply to tax on special rate incomes under Chapter XII, such as capital gains u/s 111A or 112A. This clarification, though formally proposed for enhancement from A.Y. 2026– 27, was stated to apply in principle for A.Y. 2024–25 as well.
The issue reached in ITAT Ahmedabad and the matter has been decided in favor of the assessee that there is no ambiguous in language of section 87 A and the rebate is allowable.
The board is beating the bush and has issued Circular No. 13/2025 dated 19.09.2025, granting waiver of interest under section 220(2) of the Income-tax Act, 1961, in cases where demands have been raised due to disallowance of the rebate wrongly allowed under section 87A.
Further, for FY 24-25 CPC utility not allowing rebate on STCG and allowing return on payment of tax on STCG. There is a big confusion the way issue being tackled by department. The department is not honoring decision of CIT Appeals and ITAT Ahmedabad and still insisting to deposit tax.
But still the assessee can file an appeal against CPC intimation under section 143 (1) on tax paid on STCG which they have been forced to deposit for FY 24-25. Because there is no other provision to claim refund other to claim the same through return.
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