Tax rebate under Section 87A helps taxpayers lower their tax liability under both tax regimes – old and new. Before July 5, taxpayers were allowed to claim this rebate on even special-rate incomes, including short-term capital gains. However, the tax department after July 5 modified the utility for tax-return filers to not allow them to claim a rebate on account of short-term capital gains under 87A.
Now, the tax department has reportedly started sending notices to those taxpayers who claimed 87A rebate on short-term capital gains. A LinkedIn post claimed that the tax department is “sending demand notices for claiming rebates to those with capital gains…”
The ITR filing utilities stopped allowing taxpayers to claim rebate under 87A for various special rate incomes including short-term capital gains on stocks or mutual funds taxable under Section 111A. So a big controversy arose after the tax department changed the schema of utility software, resulting in the deactivation of the facility to avail 87A rebate benefits on special-rate incomes.
This rebate exclusion on special rate incomes for taxpayers has been a subject of debate since then. A writ was filed before the Bombay High Court to allow taxpayers to self-assess their income. The petitioners claimed that it is the constitutional right of the taxpayers to self-assess their incomes.
The Bombay High Court later ruled that the Income Tax Department should not prevent taxpayers from claiming rebates on special-rate income solely due to software restrictions in the tax filing system.
The court said that rebate claims need to be assessed during the tax scrutiny process and should not be blocked outright.
Later, in Budget 2025, the government made its stance clear, saying capital gains, lottery winnings and similar income sources will not be eligible for the rebate.
Meanwhile, the Central Board of Direct Taxes (CBDT) also said that capital gains taxable under sections 111A and 112 will not be considered for enhanced income-tax rebate under section 87A proposed in the Finance Bill 2025.
“It is proposed that where resident individuals opt for the new tax regime of Section 115BAC, the incomes chargeable to tax at special rates (for example, capital gains taxable under Section 111A, Section 112, etc.) shall be excluded from calculating the Section 87A rebate,” the CBDT said in a new document on “Key highlights of Finance Bill 2025” published on its official website on Thursday, February 20, 2025.
The Finance Bill 2025 has proposed to hike the income threshold for claiming a tax rebate under Section 87A for resident individuals taxable under the new regime to Rs 12 lakh from Rs 7 lakh.
The maximum rebate under section 87A has been hiked to Rs 60,000 from the earlier Rs 25,000 under the new tax regime.
The belated ITR deadline was extended to allow this. “Now the IT department is sending notices to those who claimed this rebate,” according to a Post.
What to do now?
“The returns can’t be revised now. You now have the option of reprocessing your return under rectification,” it said in the LinkedIn post.
However, interest may increase if the rectification order is not in your favour, it added.
What is the income-tax view?
As per the Memorandum to Finance Bill, 2025, the department’s view is that rebate isn’t allowed for incomes taxable at special rates including: Short-term capital gains u/s 111A at 20%, and long-term capital gains u/s 112A at 12.5%.
