For many taxpayers, the promise of a "zero tax" liability under Section 87A can be misleading if they also earn Short-Term Capital Gains (STCG). The reason is a fundamental clash in rules: the 87A rebate applies to the normal tax slab rates, while STCG is frequently taxed at a special, flat rate. This mismatch is why an individual with a modest income might still face a tax demand, creating a common point of confusion.
What is Section 87A?
Section 87A is a rebate that reduces the income tax payable for resident individuals whose total taxable income does not cross a specified limit in a year (for example, Rs 7 lakh under the current new regime, and Rs 5 lakh under the old regime, with higher limits notified for future years). It effectively brings the tax liability to zero up to that threshold, subject to the maximum rebate amount prescribed for that year. The rebate is applied on the tax amount before adding health and education cess.
What is STCG in this context?
Short-term capital gains generally arise when you sell capital assets such as listed shares or equity mutual funds within a short holding period and make a profit. STCG on listed equity/equity mutual funds covered by Section 111A is usually taxed at a special flat rate (for example, 15%), instead of the normal slab rates applicable to salary or business income. Because of this special-rate treatment, STCG is often computed and taxed separately from your regular slab-income.
Why is there a conflict?
The conflict arises from a technicality in the Income Tax Act. The Section 87A rebate is applied to the total income tax calculated on your income. However, Short Term Capital Gains (STCG) under Section 111A are taxed at a flat, special rate (e.g., 15%), and this tax is considered a separate part of your total tax liability. The rebate under Section 87A is often interpreted as only being applicable to the tax calculated as per the normal income slabs, not to the tax arising from these special-rate incomes. This is why STCG can "block" the rebate: it creates a tax obligation that the rebate cannot erase, leaving you with a payable amount even when your total income is below the rebate threshold.
For Assessment Year 2024-25, under the new tax regime (Section 115BAC(1A)), taxpayers with a total income (including STCG under Section 111A) not exceeding Rs 7 lakh remain eligible for the full Section 87A rebate. Recent clarifications from the ITAT Ahmedabad and Bombay High Court affirm that no legal provision expressly prohibits applying the rebate to the tax liability on such capital gains.
Key Points
Applicability: The Section 87A rebate is determined by a taxpayer's total income, which expressly includes STCG taxable under Section 111A.
No Legislative Bar: Neither Section 87A nor Section 111A contains an explicit provision that prohibits claiming the rebate against the tax on such capital gains.
Systematic Errors & Judicial Relief: Certain automated processing systems have erroneously denied the rebate. However, this practice has been deemed incorrect and unjustified by rulings from various Income Tax Appellate Tribunals (ITAT).
Remedy for Taxpayers: Individuals who were denied the rebate can file an application for rectification or an appeal, citing the favorable ITAT rulings as a legal precedent.
Future Amendment (From AY 2025-26): The Finance Act 2025 introduces an amendment that will specifically disallow the Section 87A rebate against tax on special rate incomes, including STCG and LTCG.
Current Eligibility (AY 2024-25): For the current and previous years, the rebate remains fully claimable on STCG, provided the taxpayer's total income is within the Rs 7 lakh threshold under the new tax regime.
Practical implications
Eligibility: Your total income, including STCG, must be less than Rs 7 lakh under the new tax regime.
Rebate Value: The maximum rebate amount is Rs 25,000.
If Denied: You can seek redress by filing for rectification (Section 154) or an appeal.
Legal Support: Reference the ITAT Ahmedabad ruling from August 2025 in your application.
For the relevant assessment years, the inclusion of Short-Term Capital Gains (STCG) does not render a taxpayer ineligible for the Section 87A rebate. Taxpayers should verify that the claim has been properly filed and must be prepared to challenge erroneous denials through an appeal process.
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