What happens when the Income Tax Department denies your Section 87A rebate because you earned short-term capital gains?
A recent Jaipur ITAT ruling has offered relief to taxpayers, holding that for AY 2024-25, the rebate could not be denied against tax payable on short-term capital gains merely because those gains were taxed at a special rate.
The case highlights a key difference between the tax law applicable for AY 2024-25 and the rules introduced later.
For taxpayers who saw their 87A rebate reduced or rejected during return processing, the ruling could therefore be important. But does the decision mean everyone who had short-term capital gains in AY 2024-25 can claim the rebate or seek a refund?
Here is what the Jaipur ITAT ruling means, who could benefit, and what options taxpayers may have.
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The case
In Income Tax Officer v. Madhu Agarwal [ITA No. 390/JPR/2026, Assessment Year 2024-25, order dated 20 August 2026], the Jaipur Bench of the Income Tax Appellate Tribunal considered whether a resident individual could claim a rebate under section 87A against tax payable on short-term capital gains taxable at the special rate prescribed under section 111A of the Income-tax Act, 1961.
The taxpayer had declared a total income of Rs. 4,99,250, comprising income from business or profession, income from other sources, short-term capital gains of Rs. 3,61,100 and long-term capital gains of Rs. 44,082. As she had not exercised the option under section 115BAC(6), her income was governed by the new tax regime under section 115BAC(1A). She claimed a rebate of Rs. 23,276 under section 87A.
While processing the return under section 143(1), the Centralised Processing Centre denied the rebate insofar as it related to tax payable on the short-term capital gains. On appeal, the CIT(A) allowed the taxpayer’s claim, observing that section 87A, as applicable to Assessment Year 2024-25, did not expressly exclude tax payable on short-term capital gains under section 111A.
The CIT(A) also held that a debatable issue involving the interpretation of a statutory rebate could not be determined through a mechanical adjustment while processing the return under section 143(1). The consequential demand was therefore directed to be deleted.
The Revenue challenged this decision before the Tribunal, contending that rebate under section 87A was not available against tax payable on income chargeable at special rates. It also relied on CBDT Circular No. 13/2025 dated 19 September 2025, which stated that allowing such a rebate was never the legislative intent.
The taxpayer, however, relied on a series of Tribunal decisions in which the rebate had been allowed in similar circumstances. The Department was unable to distinguish those decisions or cite any contrary ruling of the jurisdictional High Court or the Supreme Court.
The Tribunal noted that, for Assessment Year 2024-25, section 87A granted rebate with reference to the tax payable on the taxpayer’s total income and did not distinguish between income taxable at normal rates and income taxable at special rates. It found the absence of an exclusion for short-term capital gains under section 111A particularly significant, since section 112A expressly restricts the rebate in relation to specified long-term capital gains.
The Tribunal further observed that the subsequent amendment restricting the rebate against special-rate income was introduced prospectively and could not be applied to an earlier assessment year. A subsequent circular or explanatory memorandum could not override the clear statutory language applicable to the year under consideration.
Following the consistent view taken in earlier decisions, the Tribunal upheld the order of the CIT(A) and held that the taxpayer was entitled to rebate under section 87A against the tax payable on her short-term capital gains under section 111A. Accordingly, the Revenue’s appeal was dismissed.
What exactly does the ITAT Jaipur ruling mean for taxpayers who had STCG and claimed Section 87A rebate for AY 2024-25?
The ruling is particularly relevant to taxpayers whose rebate was denied by the Centralised Processing Centre while processing their return for Assessment Year 2024-25. Taxpayers with pending rectification applications or appellate proceedings may rely on this decision, along with similar rulings of other Tribunal Benches, to support their claim.
Where no proceedings are presently pending, the availability of rectification, appeal or any other remedy would need to be examined separately, having regard to the applicable limitation period and the facts of the case.
The decision does not automatically grant a refund to every taxpayer who earned short-term capital gains, nor does it override the express restriction applicable to certain long-term capital gains under section 112A.
Further, as an ITAT ruling, it is binding in the case decided and carries persuasive value in similar matters, but remains subject to any contrary decision of a jurisdictional High Court or the Supreme Court.
“Its principal significance is that, under the law applicable to Assessment Year 2024-25, the absence of an express restriction in sections 87A and 111A could not be supplemented through return-processing software, a subsequent clarification or a prospective legislative amendment,” said CA (Dr.) Suresh Surana.
Why has the issue of Section 87A rebate on STCG become contentious when the taxpayer’s total income is within the prescribed limit?
The controversy arises from the interrelation between Section 87A and the provisions prescribing special tax rates for short-term capital gains. For Assessment Year 2024-25, Section 87A provided a rebate of up to Rs. 25,000 to an eligible resident individual whose total taxable income under the new tax regime did not exceed Rs. 7 lakh.
The provision referred to tax payable on the taxpayer’s “total income” i.e. total taxable income and did not expressly exclude short-term capital gains taxable under section 111A. Taxpayers therefore argued that once the prescribed total-income condition was satisfied, the rebate should extend to the entire tax liability, including tax on such capital gains.
The tax-return processing system, however, denied the rebate against tax calculated at special rates. The Revenue’s position was that section 87A was intended to provide relief against tax computed at the normal rates under the new regime and not against tax imposed separately under provisions such as section 111A.
This resulted in a difference between the literal wording of section 87A and the manner in which the provision was interpreted and implemented by the processing system.
The dispute was further intensified by the subsequent amendment expressly restricting the availability of the rebate against tax payable on special-rate income. While the Revenue treated the amendment and subsequent CBDT clarification as reflecting the original legislative intent, taxpayers contended that the prospective amendment itself demonstrated that no such restriction existed for Assessment Year 2024-25.
The absence of an express restriction in section 111A, particularly when section 112A specifically restricts the rebate in relation to certain long-term capital gains, ultimately became the central point of contention.
The government subsequently changed the provisions relating to Section 87A. How should taxpayers distinguish the AY 2024-25 position from the rules applicable to later years?
For Assessment Year 2024-25, the law granted an eligible resident individual governed by section 115BAC(1A) a rebate of up to Rs. 25,000 where total taxable income did not exceed Rs. 7 lakh.
The provision referred to tax payable on the taxpayer’s total taxable income and did not expressly restrict the rebate to income taxable at normal slab rates. On this basis, the Jaipur ITAT held that the rebate could also be adjusted against tax payable on short-term capital gains under section 111A.
“The subsequent amendment operates prospectively from Assessment Year 2026-27. Although the income threshold under the new regime has been increased to Rs. 12 lakh and the maximum rebate to Rs. 60,000, the rebate cannot exceed the tax calculated at the normal slab rates prescribed under section 115BAC(1A),” commented Surana.
Consequently, it cannot be used to reduce tax payable on income subject to special rates, including short-term capital gains under section 111A. The corresponding restriction continues under section 156(3) of the Income-tax Act, 2025.
If a taxpayer’s 87A rebate on STCG was denied while processing the return, what options are available to claim relief, and should taxpayers revisit their earlier returns?
Where the taxpayer had claimed the section 87A rebate in the return but the Centralised Processing Centre denied it while issuing an intimation under section 143(1), the taxpayer may consider filing a rectification application under section 154, requesting reprocessing of the return in light of the Jaipur ITAT ruling and other similar decisions.
Rectification is available for a mistake apparent from the record and may generally be sought within four years from the end of the financial year in which the relevant intimation or order was passed. However, since the Department may regard the issue as involving legal interpretation, acceptance of the rectification request cannot be assumed.
“Alternatively, an appeal may be filed against the intimation under section 143(1) or against an order rejecting the rectification request. An appeal is ordinarily required to be filed electronically in Form 35 (New Form 10CC) within 30 days of receiving the relevant intimation or order. Where this period has expired, the appellate authority may condone the delay if the taxpayer demonstrates sufficient cause for not filing the appeal earlier,” according to Surana.
Taxpayers who did not claim the rebate in the original return should note that the time limit for filing a revised return for Assessment Year 2024-25 has already expired.
An updated return is generally not an appropriate remedy because it cannot be used to reduce the tax liability or claim or increase a refund. In such cases, the feasibility of a condonation application under section 119(2)(b) may be considered.
Disclaimer: This article is for informational purposes only and does not constitute professional tax advice. Tax laws and regimes are subject to frequent changes by the government. Readers should verify details with official Income Tax Department notifications or consult a Chartered Accountant before making any financial decisions.
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