ITR filing |Tax rebate on short-term capital gains: ITAT ruling opens a window

Will the Ahmedabad tax tribunal's ruling allowing section 87A rebate on STCG offer clarity to taxpayers?

The ambiguity over whether small taxpayers’ special rate income – particularly, short-term capital gains tax – will be eligible for the rebate under section 87A under the new tax regime, has reared its head again.

A recent ITAT-Ahmedabad (Income Tax Appellate Tribunal) order has reopened the debate and has created a window of opportunity for such taxpayers to claim a rebate while filing their returns for financial year 2024-25 (that is, assessment year 2025-26).

As per the Finance Act for FY 2025-26, the 87A rebate on incomes up to Rs 12 lakh (Rs 7 lakh earlier) under the new tax regime is not applicable to special rate incomes such as short-term capital gains made on sale of equity shares or equity-oriented mutual fund units. However, the case pertained to the previous financial year.

The taxpayer, Jayshreeben Jayantibhai Palsana, had filed ITR declaring total income of Rs 4,27,635 for FY 2023-24 (AY 2024-25), comprising short-term capital gains under section 111A of Rs 3,79,559, long-term capital gains of Rs 38,840 under section 112A and income from other sources of Rs 9,236. She revised her return before December 31, 2024, with her total tax payable amounting to Rs 13,320.

Since her total income was less than Rs 7 lakh, she claimed a rebate of Rs 13,320 under section 87A, which allows rebate of up to Rs 25,000 on incomes of up to Rs 7 lakh (limit raised to Rs 12 lakh from FY 2025-26). However, the income department and later the Commissioner of Income Tax – Appeals (CIT-A) denied the rebate claim. Aggrieved, she approached ITAT-Ahmedabad, which overturned the Bengaluru CPC and CIT(A) orders and ruled in her favour.

“…the Finance Bill 2025 itself proposes to insert new restrictions on rebate under section 87A w.e.f. AY 2026–27, which implies that the existing law (i.e., as applicable to A.Y. 2024–25) does not contain such a restriction. Secondly, the explanatory Memorandum cannot override the plain language of the statute. Therefore, the prospective amendment in the Finance Act 2025 supports the view that under the unamended provision applicable for AY 2024–25, rebate under section 87A cannot be denied merely because tax arises under section 111A,” the tribunal noted in its order.

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.

Also read: Taxpayers, CAs challenge I-T notices on rebate claims before appellate body

Precedent for FY 2024-25?

To be sure, Palsana’s case pertained to FY 2023-24 (AY 2024-25). But can taxpayers with income of up to Rs 7 lakh (plus standard deduction of Rs 75,000 for salaried individuals) use this as a ground to claim section 87A rebate on the short-term capital gains component of their income for the financial year 2024-25? Chartered accountants have differing opinions on the conundrum.

“The Ahmedabad ITAT judgement made it clear that neither Section 87A nor Section 111A contains any express restriction barring this rebate. The tribunal also noted that, unlike the specific exclusion for long-term capital gains in Section 112A(6), the absence of such wording for STCG under 111A is legally significant and must be construed in favour of the taxpayer. Existing system-driven denials or contrary interpretations by tax authorities have no legal basis for assessment years prior to 2026-27,” says SR Patnaik, Partner (head-taxation), Cyril Amarchand Mangaldas.

However, Abhishek Soni, Founder of tax consultancy portal TaxWin believes that the order is case-specific. “As per the order of Hon’ble Ahmedabad ITAT, relief has been granted to the concerned taxpayer. However, this order is applicable only to that taxpayer. Anyone else seeking the same benefit will have to file an appeal, and relief will be given only if the order is passed in their favour,” he says.

It may be recalled that 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 this (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.

In the case of some appeals made in Mumbai and Gujarat, the Commissioner of Income Tax (Appeals) did rule in favour of such taxpayers. “This time round, the ruling has come from a tax tribunal. It will definitely apply to cases in Gujarat, but even other taxpayers can cite this order and claim tax rebate on their special rate income, provided their total income does not exceed Rs 7 lakh,” says Mayank Mohanka, Founder-Director, TaxAaram.com.

Also read: Will your Rs 12-lakh salary enjoy ‘nil’ tax even with additional STCG income? Here’s what experts say

No wishing away disputes despite the ruling

Despite the ITAT ruling, however, it is unlikely that income taxpayers will have smooth sailing when they claim rebate on STCG in FY 2024-25 (AY 2025-26).

“Given the disconnect between the legal position as clarified by judicial authorities and system/program-driven denials by the Central Processing Centre (CPC), it is highly likely that a significant number of disputes and appeals will follow. The CPC is known to reject claims for Section 87A rebate on STCG by default, often without an opportunity for taxpayers to explain or contest the adjustment, leading to unnecessary demand notices,” says Ankit Jain, Partner, Ved Jain and Associates.

Eventually, such cases may end up at ITAT and CIT(A) forums. “As more taxpayers become aware of the ITAT and CIT(A) decisions in their favour, and with divergent views in administrative orders, both sides—taxpayers and the department—are likely to pursue their cases to higher judicial forums, including the jurisdictional High Courts and potentially the Supreme Court,” adds Jain. Nevertheless, the recent Ahmedabad ITAT order does provide robust legal grounds for taxpayers to appeal against rebate denial. “It is only through consistent judicial pronouncements or clear administrative circulars that these disputes will ultimately be resolved, but for now, affected taxpayers have strong legal standing to appeal adverse decisions,” he says.

Soni, on the other hand, believes that the income tax department will take into account the fact that the disputed amounts are small. "Normally, the I_T department would have filed an appeal before the High Court against an ITAT order. However, in these cases, since the amount involved is very small, they might not file an appeal," he says.