Some CIT(A) rulings have supported the taxpayer’s interpretation that the 87A rebate should apply to total income, including capital gains. However, until a clear judicial or legislative resolution is established, the issue remains contentious.
A major controversy has emerged surrounding the applicability of the Section 87A rebate under India’s income tax law, especially for taxpayers with capital gains income. The confusion stems from whether the rebate applies to Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG) under the new tax regime.
Budget 2025: Increased Rebate Limit and Rising Confusion
The Union Budget 2025 raised the Section 87A rebate limit to ₹12 lakh under the new tax regime. However, tax experts highlight ongoing uncertainty about whether this rebate extends to special rate incomes like STCG and LTCG.
Under the new regime, taxpayers with a total income up to ₹7 lakh can claim the rebate, effectively reducing their tax liability to zero. However, ambiguity persists regarding whether the rebate calculation should include or exclude capital gains.
Tax Expert Insight on Section 87A Rebate
According to Yeeshu Sehgal, Head of Tax Markets at AKM Global:
“There’s a significant issue with the application of Section 87A, particularly for taxpayers with both regular income and capital gains. While Budget 2025 clarified that special rate incomes are excluded from the rebate, confusion remains about whether the rebate applies to total income or just the regular income portion.”
CBDT’s Position: Capital Gains Excluded from Section 87A Rebate
The Central Board of Direct Taxes (CBDT) has clearly stated that STCG and LTCG are excluded from the rebate calculation. This position has been enforced through the ITR utility portal, where the rebate is automatically denied for capital gains.
Taxpayers have started receiving notices for incorrect rebate claims due to this exclusion.
According to Gaurav Jain, Partner at Forvis Mazars:
“CBDT has suo-moto denied the Section 87A rebate for STCG and LTCG in the ITR utility portal, leading to widespread controversy.”
Also Read: Bombay High Court Quashes Income Tax Reassessment Against Tata Communications
When Is the Section 87A Rebate Allowed or Denied?
To clarify the confusion, here’s a breakdown of when the rebate is applicable:
✅ Rebate Allowed:
- Regular income taxed at slab rates
- LTCG under Section 112 (except for equity shares and equity mutual funds)
- STCG under Section 111A (taxed at 15% on listed equity shares and mutual funds)
❌ Rebate Not Allowed:
- LTCG under Section 112A (on equity shares and mutual funds taxed at 10%)
Judicial Interpretations and Taxpayer Support
Some CIT(A) rulings have supported the taxpayer’s interpretation that the rebate should apply to total income, including capital gains. However, until a clear judicial or legislative resolution is established, the issue remains contentious.
What Should Taxpayers Do If They Receive a Notice?
If you’ve received a notice related to Section 87A rebate denial, here’s how to handle it:
- Review the Notice Carefully
– Verify whether your rebate claim aligns with current tax laws. - Consult a Tax Expert
– Seek advice from a Chartered Accountant (CA) to clarify your rebate eligibility. - File a Rectification or Appeal
– If the rebate was wrongly denied, submit a rectification request or contest the notice.
Expert Advice on Handling Rebate Issues
- Tax professionals recommend maintaining proper documentation and understanding your income composition before claiming the rebate.
- Taxpayers should respond to notices promptly and ensure proper documentation to support their rebate claims.
Stay Updated to Avoid Penalties
As the confusion over Section 87A rebate continues, taxpayers must stay informed and proactive. With increased scrutiny from tax authorities and evolving interpretations, consulting a professional and understanding the latest guidelines is essential to avoid penalties and ensure compliance.
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