Many taxpayers claimed rebates under this section on short-term capital gains for the financial year 2023-24. The Income Tax Department has rejected these claims and has issued demands to taxpayers to pay the outstanding taxes.
The Central Board of Direct Taxes (CBDT) has once again clarified that tax rebate under Section 87A will not be allowed for income taxed at special rates, such as short-term capital gains. Many taxpayers had claimed rebate under this section on short-term capital gains in the financial year 2023-24. The Income Tax Department has rejected such claims and has issued demands to taxpayers to pay the outstanding tax.
Outstanding tax must be paid by December 31st
The Income Tax Department has stated that such taxpayers must pay the outstanding tax before December 31st, 2025. The CBDT issued a circular in this regard on September 19th. It said, “It has been observed that in certain cases, returns have been processed and rebate is allowed under section 87A even in respect of income which is subject to special tax rates. In such cases, amendment will have to be made to disallow such rebate. This will require sending a demand to the taxpayers.”
Delayed tax payments will also incur interest on the tax.
The circular also states that if taxpayers delay paying taxes after a demand, they will be required to pay interest on the tax amount under Section 220(2). However, the Income Tax Department has decided to waive interest if the tax is paid by December 31, 2025. Starting July 2024, the Income Tax Department has denied tax rebates to many taxpayers whose income was less than ₹7 lakh but included short-term capital gains. The new income tax regime had an annual income limit of ₹7 lakh for rebate under Section 87A.
This matter reached the High Court last year.
For 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 available under Section 87A would have reduced the tax liability of such taxpayers to zero. However, the system denied the rebate on the short-term capital gains portion of income for 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 Given to Revise Returns
Following the High Court’s order, the Income Tax Department gave taxpayers time from January 1st to January 15th, 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, it was clarified in the Union Budget 2025 that from the financial year 2025-26, rebate will not be available under Section 111A on any special rate income including STCG.
Tax Experts’ Advice
Chartered accountants say such taxpayers now have two options. First, they can pay the outstanding tax. Second, they can pursue 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 than to pursue a legal battle. The Income Tax Department has made it clear that rebates will not be allowed.”
