Previously, many taxpayers, whose total income was under the exemption limit did not receive Section 87A rebate on Short Term Capital Gains and Long Term Capital Gains from the share market by the tax utility and CPC Bengaluru.
The court's decision now clarifies that the Section 87A rebate should be allowed till Assessment Year (AY) 2025-26.
Short/Long Term Capital Gains & Section 87A
Section 87A provides a rebate of up to Rs 25,000 in new tax regime for individual taxpayers if the total income (including STCG/LTCG) is below the threshold.
Judgment Held
The Ahmedabad Income Tax Appellate Tribunal (ITAT) has ruled that the 87A rebate is allowed for STCG under Section 111A as neither Section 87A nor Section 111A contains any express bar on allowing the 87A rebate on such capital gains.
This ruling, dated 12th August 2025, supports the stance that the rebate should be given, contradicting previous denials by CPC Bangalore and CIT Appeal.
The court noted that the recent changes made in the income tax utility by CPC Bangalore were not based on actual law, and a memorandum in the Finance Bill 2025 (prohibiting rebate from AY 26-27) does not constitute a change in the actual law.
In Budget 2025, a Memorandum stated that the Section 87A rebate would not be allowed on special rate incomes from A.Y.2026-27, but until then, the law (as per Income Tax Act) hasn't changed.
Practical Case
A taxpayer whose income (including capital gains) was below ₹7 lakh but was denied the rebate. Their assessment resulted in a demand amounting ₹13,320 but the taxpayer won the case at ITAT Ahmedabad and got relief.
The process involved rejection at the ITO and CIT Appeals, but ITAT accepted that law overrules systems or software errors-the Income Tax Act does not restrict the rebate here.
Refunds for Past Years
Taxpayers who paid extra tax due to denied rebate for prior years can now claim refunds, following the court's logic.
However, practical hurdles remain: pursuing refunds often requires appeals to ITAT, incurring costs (government fees, professional fees), which may exceed the tax savings in many individual cases.
What Should Taxpayers Do Now?
For AY 2024-25 and AY 2025-26, taxpayers can claim the Section 87A rebate if eligible, even if the CPC system or utility denies it.
If a claim is rejected, taxpayers can appeal (via CIT(Appeals) and ITAT) but must weigh legal/professional costs versus actual refund or savings.
From AY 2026-27, rebate on special-rate incomes (STCG under 111A, LTCG under 112A) may not be available, as per the new memorandum (unless the actual Act is amended accordingly).
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