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On January 16, 2026, the Income Tax Appellate tribunal (ITAT) Indore granted a full Section 87A tax rebate on both short term and long term capital gains from the sale of equity shares. This decision settled the long-standing dispute about whether Section 87A tax rebates could be applied to STCG and LTCG from equities.
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To give you some context on the Section 87A dispute, it all began on July 5, 2024. On that date, the Income Tax Department updated its ITR processing utility software and restricted the Section 87A tax rebate on special rate incomes like Short-Term Capital Gains (STCG) under the new tax regime. This sparked controversy and led to legal battles. On January 24, 2025, the Bombay High Court ordered the income tax department to allow Section 87A tax rebate claims on special rate incomes like capital gains, stating that any disputes would be resolved by judicial forums like ITAT and the courts.
As a result, the cases regarding the denial of the Section 87A tax rebates have now escalated to ITAT levels. Many ITATs, including those in Chandigarh, Chennai, and Ahmedabad have issued favourable rulings, allowing taxpayers to claim Section 87A tax rebates on LTCG and STCG income from equities.
A summary of the judgement
ITAT Indore ruled that for AY 2024–25, Mr. Panchal, an individual taxpayer who had opted for the new tax regime with an income not exceeding Rs 7 lakh, can claim Section 87A tax rebate. This applies even if his income includes sources that are taxed at special rates, like capital gains.
Additionally, ITAT Indore also cited previous rulings of ITAT Ahmedabad and Chennai, where the respective tribunals had observed that the first proviso to Section 87A, as applicable for the relevant assessment year, does not specify any exclusions for income taxed at special rates. if the legislature had intended to restrict rebates under Section 112A(6), it would have done so explicitly.
ITAT Indore also pointed out that other ITAT benches clarified that the “subject to Chapter XII” clause in Section 115BAC pertains to tax rate calculations and does not automatically limit the availability of rebates under Chapter VIII unless the law specifically states so. Section 87A comes into play after tax computation and applies to total tax liability, unless expressly barred.
ITAT Indore further observed that other ITAT tribunals had rejected the use of explanatory notes from the Finance Bill, 2025, noting that proposed amendments denying rebate on special-rate income are prospective and confirmthat no such restriction existed for AY 2024–25 and earlier years.
Accordingly, Section 87A tax rebate was allowed against tax on STCG under Section 111A and LTCG under Section 112. However, tax rebate on virtual digital asset was denied. The appeal was thus partly allowed, and the Assessing Officer was directed to recompute tax accordingly.
Also read: Full Section 87A tax rebate on LTCG from equity income for AY 2024-25 allowed by ITAT Chennai; know how the taxpayer won
How did this taxpayer win Section 87A tax rebate battle in ITAT Indore?
Mr. Panchal from Ratlam, Madhya Pradesh had filed his income tax return (ITR) for AY2024-25, reporting a total income of Rs 4,15,616. His total income consisted of salary, short term capital gain, long term capital gain, virtual digital asset (VDA) income and income from other sources along with agricultural income of Rs 2,74,118.
Also read: Section 87A rebate on capital gains from debt mutual fund: ITAT Chandigarh gives relief to taxpayer and cancels Rs 25,710 tax demand notice from Income Tax Dept
He had opted for the new tax regime under Section 115BAC and computed his tax liability at Rs 22,536. In his ITR he claimed Section 87A tax rebate of Rs 22,536 and effectively offered “Nil” tax.
The ITR was subsequently processed by the income tax department under Section 143(1) and was accepted without any variation. However, while computing tax liability, the tax assessing officer (AO) partially allowed rebate under Section 87A to the extent of Rs 200 only and thus disallowed the rebate of Rs 22,336.
The AO created demand for tax, cess and interest accordingly. Mr. Panchal filed a rectification application under Section 154 which was rejected by the AO through an order dated March 19, 2025. Unhappy with this order, he filed a first-appeal to CIT(A) but failed to get any relief. So, his next appeal was to ITAT Indore.
The computation of income submitted by Mr. Panchal.
| Income | Amount | Tax Rate | Tax Amount |
| Normal Income | Rs 3,03,996 | Slab rates | Rs 200 |
| Special income by way of Short Term Capital Gain u/s 111A | Rs 81 | 15% | |
| Special income by way of long-term capital gain u/s 112 | Rs 1,11,393 | 20% | Rs 22,279 |
| Special income from transfer of virtual digital asset | Rs 150 | 30% | Rs 45 |
| Total | Rs 4,15,620 | Rs 22,536 | |
| Rebate u/s 87A | Rs 22,536 | ||
| Net tax | Nil |
ITAT Indore pointed out that based on the computation of tax liability, the rebate under Section 87A, presented by his representative, which the tax department didn’t contest, shows that the AO has not allowed rebate of Rs 22,236 for three components of the tax liability, viz.
- (i) Tax of Rs 12/- on short-term capital gain u/s 111A,
- (ii) tax of Rs 22,279/- on long-term capital gain u/s 112 and
- (iii) tax of Rs 45/- on transfer of virtual digital assets.
The ITAT Indore said that in so far as the first two elements of tax liability are concerned, that is tax of Rs 12 on short-term capital gain under Section 111A and tax of Rs. 22,279/- on long-term capital gain under Section 112, the issue is well covered by the following decisions of ITAT benches in favour of assessee:
- ITAT, Ahmedabad in Jayshreeben Jayantibhai Palsana Shingala Sheri Vs. ITO, Ward-1(9), Ahmedabad, ITA No. 1014/Ahd/2025, order dated 12.08.2025 for AY 2024-25
- ITAT, Chennai in Venkedapathy Venugopal Vs. ITO, ITA No. 2064/Chny/2025, order dated 09.10.2025 for AY 2024-25
ITAT Indore said that the tax department could not cite any judicial decision against assessee or in favour of Revenue (tax department).
Judgement: “Therefore, respectfully following the pre-existing judicial decisions cited by Ld. AR as noted above, we are persuaded to accept the claim of assessee for giving rebate u/s 87A against two elements, viz.
(i) Tax of Rs. 12/- on short-term capital gain u/s 111A and
(ii) Tax of Rs. 22,279 on long-term capital gain u/s 112.
Accordingly, we direct the AO to allow a further rebate of Rs. 22,291.”
The ITAT Indore observed that Mr Panchal is not against the rebate denied by AO against the third element of tax liability i.e. against the tax on income from transfer of virtual digital assets.
ITAT Indore said: “Thus, taking into account the statement of Ld. AR, the assessee’s claim of rebate against tax liability of Rs 45 on income from transfer of digital asset is rejected. The order of AO to this extent is upheld. In conclusion, we direct the AO to allow a further rebate of Rs. 22,291/- and recompute the tax liability. The assessee succeeds partly in this appeal. Resultantly, this appeal is allowed partly. Order pronounced in open court on 16/01/2026.”
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