STCG: Taxpayers who claimed Section 87A exemption on short-term capital gains were wrongly found to have claimed the exemption. The department incorrectly processed such returns and granted the exemption. The department has now asked such taxpayers to pay the outstanding tax by December 31, 2025.
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Income Tax STCG: The Central Board of Direct Taxes (CBDT) clarified that tax on income from short-term capital gains (STCG) will not be eligible for tax exemption under Section 87A. Many taxpayers have incorrectly claimed this exemption, which has been rejected by the Income Tax Department. The department has now asked such taxpayers to pay the outstanding tax by December 31, 2025.
Returns Processed Incorrectly
In a circular issued on September 19, the CBDT stated that many taxpayers claimed Section 87A exemption on short-term capital gains in FY 2023-24, which was incorrect. The department incorrectly processed these returns and granted the exemption. These errors are now being corrected. Taxpayers are being sent a new demand notice regarding this matter. If the outstanding tax is not paid on time, interest will be charged under Section 220(2) of the Income Tax Act.
Relief provided by the Income Tax Department
To ease the hardship of taxpayers, the Income Tax Department has provided relief. Interest will be waived if the outstanding tax is paid before December 31, 2025. From July 2024, the department has revoked the Section 87A exemption for taxpayers with incomes less than ₹7 lakh (approximately $1.5 million) if their income included short-term capital gains. These gains were taxable at a rate of 15% in FY 2023-24, but the rate has been reduced to 20% from 2024-25.
In FY 2023-24, incomes up to ₹5 lakh (approximately $1.5 million) under the old tax regime and up to ₹7 lakh (approximately $1.5 million) under the new tax regime were exempt. This exemption could reduce the tax to zero, but income with special tax rates, such as STCG, was not eligible. The matter reached the Bombay High Court. In December 2024, the court asked the department to allow the return amendment. A 15-day extension was granted in January 2025, but many taxpayers still received notices to pay their dues.
