The long-standing confusion surrounding Section 87A rebate claims has reared its head again. Despite revising their income tax returns (ITRs) in January 2025 as per the Bombay High Court's directive, numerous taxpayers-primarily those with total incomes below Rs 7 lakh-are now being served demand notices by the Income Tax Department.
Tax experts reveal that these notices, issued under Section 143(1) of the Income Tax Act, disallow the Section 87A rebate for income taxed at special rates-such as Short-Term Capital Gains (STCG) taxed at 15% under Section 111A-even when claimed within the permitted revision window.
Backdrop: The 87A Rebate Confusion
In FY 2023-24 (AY 2024-25), the rebate under Section 87A was available for taxpayers with total incomes up to Rs 5 lakh under the old regime and up to Rs 7 lakh under the new tax regime. However, the interpretation around whether this rebate applied to special rate incomes like STCG remained contentious.
After the Income Tax Return (ITR) utility update on July 5, 2024, taxpayers who attempted to file or revise returns found themselves unable to claim the rebate on STCG income under the new regime. Following legal challenges, the Bombay High Court in December 2024 directed the I-T department to provide a revision window-which it did from January 1 to January 15, 2025.
However, despite revising their returns in good faith, many taxpayers have now been slapped with demand notices disallowing the very rebate they sought through revision.
CAs File Appeals with CIT(A)
Several Chartered Accountants confirmed they are assisting clients in filing appeals with the Commissioner of Income Tax (Appeals) [CIT(A)].
"Taxpayers have 30 days from receiving the intimation to file Form 35 electronically via the e-filing portal. Supporting documents like filed returns, demand notices, computation sheets, and the Bombay HC judgment should be attached," advised a senior CA.
Some appeals-particularly from Gujarat and Mumbai-have already seen favorable outcomes for taxpayers, bringing a glimmer of hope. However, CAs caution that each case will be judged individually.
Taxpayers Caught in the Crossfire
Even taxpayers who filed before the July 5 utility update and were earlier granted the rebate are now facing demands. Experts note that suo-moto rectification orders are being issued, nullifying previously accepted claims and raising fresh demands-even for minor amounts.
"The IT utility was revised following court orders. Taxpayers revised their returns within the given timeframe. Yet, they're facing demands. It's frustrating," said another tax consultant.
Budget 2025 Clarification Adds to Confusion
While the Union Budget 2025 has clarified that from FY 2025-26 onwards, special rate incomes like STCG under Section 111A will not qualify for the rebate, no such restriction applied to FY 2023-24. This distinction has further added to the taxpayers' grievances.
What Should Taxpayers Do Now?
- Check if 30 days have passed since receiving the intimation under Section 143(1).
- File Form 35 online to appeal against the demand, especially if the tax amount is significant.
- Attach relevant documents, including computation sheets and legal references.
For smaller amounts, some professionals advise paying the demand to avoid lengthy proceedings. However, for larger sums or principle-based claims, appeals are being strongly recommended.
Conclusion
The rebate denial saga continues to trouble honest taxpayers. As appeals stack up, all eyes are now on the appellate authorities to bring clarity and relief in a matter that has become a test case for administrative consistency and legal interpretation in India's tax regime.
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