The debate around Section 87A rebate on short-term capital gains (STCG) refuses to die down. At the heart of it lies a conflict between the Income Tax department’s utility software and judicial rulings, leaving lakhs of taxpayers unsure of their next step.
The Income Tax Return (ITR) utility for FY 2024–25 does not permit taxpayers to claim the Section 87A rebate on STCG under Section 111A, despite a Bombay High Court directive and an Income Tax Appellate Tribunal (ITAT)ruling that supported such claims. Under current rules, taxpayers with total taxable income up to Rs 5 lakh under the old regime or Rs 7 lakh under the new regime are entitled to a full rebate. But when this income includes STCG, the system simply blocks the rebate.
Manual entry, but at what cost? Practitioners say the only workaround is to manually enter the rebate in the relevant column. This is not new as tax professionals tried the same approach last year. “If one wants to claim rebate under Section 87A for STCG then one can manually enter value in the rebate column. This happened last year also. But later, in the intimation orders, the department reversed the rebate, leading to fresh tax demands,” says Himank Singla, Partner, SBHS & Associates.
For FY 2024–25, the situation remains the same. “If a client is comfortable with litigation, we manually change it. Otherwise, 99% of ITRs are being filed as per the utility,” adds Singla. In other words, taxpayers must weigh the benefit of a possible rebate against the near certainty of receiving an intimation order demanding reversal, and the subsequent legal hassle.
However, some experts argue that since the law is currently on the taxpayer’s side, the rebate can indeed be claimed manually. “For FY 2024-25, taxpayers can still manually claim the Section 87A rebate on short-term capital gains, even if the ITR utility doesn’t auto-apply it. But from FY 2025-26 onwards, the rebate will no longer be available for such gains as per the amended rules,” explains Sujit Bangar, founder of Taxbuddy.com.
This issue gained momentum after ITAT-Ahmedabad order reopened the debate. It created a window of opportunity for such taxpayers to claim a rebate while filing their returns for financial year 2024-25. It also said there existed no bar either in section 87A or section 111A for denial of rebate on tax payable on short-term capital gains arising from transfer of listed equity shares taxable at special rates under section 111A for the financial years preceding FY 2025-26 (that is, AY 2026-27). “The legislative intent is further clarified by the subsequent amendment proposed in the Finance Bill, 2025, which is prospective in nature and thereby reinforces that no such restriction was in force during the relevant assessment year,” the order noted.
Earlier in January and February 2025, such aggrieved taxpayers and their consultants had filed appeals against the I-T department’s intimations to taxpayers and denial of rebate under the new tax regime. This followed the Bombay High Court’s order directing I-T to allow taxpayers to revise their returns and consider the cases of those who filed their return after July 5, 2024 – when the ITR utility was updated – and were denied the rebate on STCG portion of their income. Subsequently, a 15-day window was created to allow such taxpayers to revise their ITR between January 1 and January 15, 2025 (ordinarily, the deadline for filing belated or revised returns is December 31) on the official e-filing portal. Many did, hoping to get the rebate on their STCG income too.
What lies ahead? The Finance Act 2025 has made the government’s stance clear, rebate under Section 87A will not apply to special rate incomes like STCG from AY 2026–27. But until then, the law backed by ITAT rulings and the Bombay High Court favors taxpayers. Claiming the rebate manually is possible, but it could trigger tax demands and litigation. For the cautious, sticking to what the ITR utility permits may be the safer path. For the bold, the fight for Section 87A rebate on STCG continues.
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