The Section 87A rebate, a key provision in India’s income tax law, has sparked confusion among taxpayers, especially those with capital gains income. While Budget 2025 increased the rebate limit to ?12 lakh under the new regime, ambiguity remains over whether it applies when a taxpayer has both regular income (like salary) and special rate incomes, such as Short-Term Capital Gains (STCG).
The issue: Does the rebate apply to capital gains?
Taxpayers with total income up to ?7 lakh under the new regime can claim a rebate, effectively reducing their tax liability to zero.
However, experts say its application to special rate incomes like capital gains is unclear.
“There is an issue with the application of the Section 87A rebate, specifically for taxpayers with both regular income and special rate incomes such as STCG. While Budget 2025 clarified its exclusion for special rate incomes, confusion persists on whether the rebate should be calculated on total income or only on the regular income portion,” said Yeeshu Sehgal, Head of Tax Markets, AKM Global.
The Central Board of Direct Taxes (CBDT) has excluded STCG and Long-Term Capital Gains (LTCG) from the rebate while processing returns through the ITR utility portal, leading to tax notices for many taxpayers.
Gaurav Jain, Partner, Direct Tax, Forvis Mazars, said that “CBDT has suo-moto in the ITR Utility portal denied benefit of rebate under Section 87A on such short-term and long-term capital gains, creating a controversy.”
When is the rebate allowed or denied?
Allowed:
Normal income taxed at slab rates
Long-term capital gains under Section 112 (on capital assets other than listed equity shares & equity mutual funds)
STCG under Section 111A (taxed at 15% on listed equity shares & equity mutual funds)
Not allowed
LTCG under Section 112A (on equity shares & equity mutual funds taxed at 10%)
“Some taxpayers believe that rebate under Section 87A should be available on the total income, including capital gains,” said Jain. “In fact, some CIT(A) rulings have favoured this interpretation. Until the matter is resolved legislatively or judicially, taxpayers should contest the denial and file appropriate responses.”
What should taxpayers do if they receive a notice?
Review the notice – Check if the rebate claim aligns with tax provisions.
Consult a tax expert – Seek advice from a Chartered Accountant (CA) to validate the claim.
File a rectification or appeal – If wrongly denied, file a rectification request or contest the notice.
“In case of a tax notice, taxpayers should ensure they respond timely and have adequate documentation to support their calculations,” said Sehgal.
CA Ruchika Bhagat, MD, Neeraj Bhagat & Co., said taxpayers must carefully analyse their income composition before claiming the rebate.
“Rebate is allowed on normal income taxed at slab rates, but certain capital gains are excluded. Understanding this distinction is crucial for accurate tax filings," she said.
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