New Delhi: There is renewed confusion over whether small taxpayers can claim a tax rebate under Section 87A on short-term capital gains (STCG) income under the new tax regime.
This issue came into focus again after a recent ruling by the Income Tax Appellate Tribunal (ITAT) in Ahmedabad. The decision has opened the door for taxpayers to claim this rebate while filing income tax returns for the financial year 2024–25 (assessment year 2025–26).
According to the Finance Act for FY 2025–26, the rebate under Section 87A (available for income up to Rs 12 lakh from that year onward) is not allowed on special rate incomes like STCG from the sale of shares or equity mutual funds. But the ITAT case was related to the earlier year and highlighted that this restriction was not in place at the time.
In the case, the taxpayer had a total income of Rs 4.27 lakh for FY 2023–24, most of it from short-term capital gains. She filed her return and claimed a tax rebate under Section 87A, as her income was below Rs 7 lakh, the earlier limit for the rebate. However, tax authorities denied her the rebate. She appealed, and ITAT ruled in her favour, stating that there was no rule blocking the rebate for such income in that assessment year.
The tribunal pointed out that the new restriction was only introduced prospectively (i.e., from the next financial year onward), confirming that it didn’t apply to the earlier year.
This has raised a key question: Can taxpayers with total income up to Rs 7 lakh (including STCG) claim the rebate under the new tax regime for FY 2024–25? While the tribunal decision supports this view, opinions among tax experts remain divided. Some believe the ruling creates a strong legal ground for taxpayers, while others caution that each case will still need to go through the appeals process individually.
Earlier in 2025, some taxpayers were denied the rebate automatically by the income tax portal due to system errors or mismatches in interpretation. After a High Court intervention, the tax department allowed affected taxpayers to revise their returns during a special 15-day window in January 2025. Many used this chance to claim rebates on their STCG income.
In some regions like Mumbai and Gujarat, tax officers have already ruled in favor of such claims. With the ITAT ruling now in place, taxpayers in Gujarat and elsewhere may use this order to support their own claims for rebate, as long as their total income remains under Rs 7 lakh.
However, challenges remain. Even if the law allows for the rebate, the tax department’s automated processing system often denies it by default, without letting the taxpayer explain. As a result, many taxpayers may need to file appeals to get their rebate approved.
It’s expected that more such cases will end up at higher levels of appeal, including at tribunals and courts. While there’s hope that the matter will be settled by clear court decisions or official circulars, for now, taxpayers do have legal support if they wish to challenge any denial of the rebate.
Interestingly, the tax department might not appeal the ITAT ruling in this case, since the disputed amounts are small. But until there’s a consistent policy or ruling, the confusion is likely to continue for taxpayers with short-term capital gains under the new tax regime.
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