Tax News: Under the old tax regime, a tax rebate is available for incomes up to ₹5 lakh, and under the new regime, for incomes up to ₹7 lakh, resulting in zero tax liability. However, the department has refused to grant this rebate on income subject to a special tax rate, even if the total income under the new system is less than ₹7 lakh. Here’s a special report by our correspondent…
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Income Tax Department has clarified that the special tax rebate under Section 87A is not applicable to short-term capital gains. This includes income from the sale of shares and mutual fund units. Taxpayers who have claimed this rebate have been granted an extension until December 31, 2025, to pay the outstanding tax. However, interest on the outstanding tax will be waived.
The department recently issued a circular on this matter. It stated that several taxpayers had claimed a tax rebate under Section 87A for this “income subject to a special tax rate” during the financial year 2023-24. While some of these claims were initially accepted, the department later found that the rebate was not permissible under the rules and subsequently revoked it. This has resulted in additional tax liability for those taxpayers, and they have been issued notices to pay the outstanding tax.
Interest to be waived
The circular states that if the concerned taxpayers pay their outstanding tax by December 31, 2025, the interest payable will be waived. This relief will apply only in cases where the exemption was wrongly granted and the tax liability was subsequently reassessed.
What is the issue?
As per the rules, a rebate under Section 87A is available for income up to ₹5 lakh under the old tax regime and ₹7 lakh under the new tax regime, making the tax liability zero. However, from July 2024, the department refused to grant the rebate on ‘income subject to a special tax rate,’ even if the total income under the new regime was less than ₹7 lakh. ‘Income subject to a special tax rate’ includes short-term capital gains, such as income from the sale of shares and equity mutual funds.
The case reached the High Court
Several taxpayers challenged this issue in the Bombay High Court. In December 2024, the court directed the department to reconsider the matter. Subsequently, taxpayers were given an opportunity to amend their returns between January 1 and 15, 2025. Many taxpayers filed updated returns hoping for the rebate, but did not receive any relief. In February 2025, many received notices demanding payment of the outstanding tax.
Provisions in the Budget
The Union Budget 2025 clarified that from the financial year 2025-26, no rebate will be available on all ‘specified rate income’, including short-term capital gains (under Section 111A). This section pertains to short-term gains from the sale of listed shares and equity mutual funds. The tax rate on this was 15% in FY 2023-24 and was increased to 20% from FY 2024-25.
What is Specified Rate Income?
Specified rate income refers to types of income that are taxed at fixed rates, separate from the standard income tax slabs. These typically include short-term capital gains on shares, long-term capital gains, gains from cryptocurrencies, lottery or game show winnings, and certain dividend income. The rebate under Section 87A does not apply to such income, meaning that tax will have to be paid on it.
