The Income Tax Department has started issuing demand notices to taxpayers who claimed a rebate under Section 87A on short-term capital gains (STCG) in their Income Tax Returns (ITRs). This move follows a July 5 modification in the ITR utility, which stopped taxpayers from availing rebates on special-rate incomes, including STCG taxable under Section 111A.
Why Are Taxpayers Receiving Notices?
Until July 5, 2024, taxpayers were able to claim the rebate under Section 87A even on certain special-rate incomes, including capital gains from stocks and mutual funds. However, after the IT department updated the tax-filing utility, taxpayers were no longer allowed to claim the 87A rebate on special-rate incomes. Now, those who filed their ITRs before this change and claimed the rebate are reportedly receiving demand notices from the tax department.
A viral LinkedIn post has highlighted this issue, stating that taxpayers are being penalized for following the previous utility's provisions. With the ITR revision window closed, the only option left for affected taxpayers is to seek a rectification of their return-a move that could lead to interest charges if the rectification order is unfavorable.
Bombay High Court's Ruling on 87A Rebate for Special-Rate Incomes
Following the tax department's software modification, taxpayers challenged the exclusion of special-rate incomes from Section 87A rebate through a writ petition before the Bombay High Court. The petitioners argued that taxpayers have a constitutional right to self-assess their income and should not be restricted by technical software limitations.
In a landmark ruling, the Bombay High Court held that the tax department cannot deny rebates solely due to software restrictions and that claims should be assessed during tax scrutiny instead of being blocked outright.
Budget 2025: Government's Stance on Section 87A Rebate for Capital Gains
To remove ambiguity, the government in Budget 2025 explicitly stated that capital gains, lottery winnings, and similar income sources will not be eligible for the rebate under Section 87A. The Central Board of Direct Taxes (CBDT) further clarified that:
- Capital gains taxable under Sections 111A and 112 will be excluded from the enhanced rebate under Section 87A in the Finance Bill 2025.
- Resident individuals opting for the new tax regime under Section 115BAC cannot claim the 87A rebate on special-rate incomes.
However, the Finance Bill 2025 also increased the tax rebate threshold for resident individuals in the new tax regime:
- Maximum rebate under Section 87A: Increased from ₹25,000 to ₹60,000.
- Income threshold for claiming rebate: Increased from ₹7 lakh to ₹12 lakh.
What Should Affected Taxpayers Do?
With ITR revisions no longer possible, taxpayers who wrongly claimed 87A rebate on capital gains have the option to reprocess their return under rectification. However, experts warn that if the rectification order does not favor the taxpayer, additional interest may be charged on the demand raised by the tax department.
Final Takeaway
This controversy underscores the need for clear tax policies and real-time updates in ITR utilities. While the government has now explicitly excluded capital gains from 87A rebate eligibility, the demand notices issued to taxpayers before the software update raise concerns about fair implementation and procedural transparency. Taxpayers are advised to stay updated on tax rule changes and seek professional advice if they receive notices related to 87A rebate claims on capital gains.
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