No tax rebate for special-rate incomes, reiterates Income Tax Dept, asks taxpayers to pay up by December 31

Tax rebate not allowed, pay up before Dec 31 or cough up interest, says I-T department

The Central Board of Direct Taxes (CBDT) has once again made it clear that tax rebate under section 87A tax rebate on special-rate incomes such as short-term capital gains will not be allowed.

Several taxpayers had, in financial year 2023-24, claimed tax rebate even on short-term capital gains, but the I-T department had denied the request, issuing a demand to pay the taxes due on the amount. Now, I-T has asked such taxpayers to pay the taxes before December 31, 2025. This includes those who had, inadvertently, been extended the rebate earlier.

“It is noticed that in certain cases, the returns had already been processed and rebate was allowed under section 87 A of the Act on incomes chargeable to tax at special rates. In such cases, rectifications have to be carried out to disallow such rebate, which has been incorrectly allowed. Such rectifications will result in demands getting raised. If the payments of such demands raised are delayed, then the same are liable for charging of interest under section 220(2) of the Act,” a CBDT circular dated September 19 said.

However, the tax department has decided to waive off the interest if the taxes are deposited by December 31, 2025. “In order to mitigate the genuine hardship arising to such taxpayers on account of interest payable under section 220(2) of the Act…the interest payable under section 220(2) of the Act shall be waived in such cases where the payment of the demands raised, is made on or before 31.12.2025,” the circular stated.

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

The background

Since July 2024, the income tax department had denied tax rebate to several taxpayers with total income of less than Rs 7 lakh -- the rebate limit under the new tax regime -- including short-term capital gains (which attracted a tax rate of 15 percent in financial year 2023-24; from FY 2024-25, the rate is 20 percent).

The rebate provisions – the limits were Rs 5 lakh and Rs 7 lakh in the old and new tax regimes respectively in FY24 (assessment year 2024-25) – in the I-T Act, 1961, bring the effective tax liability down to zero. However, those who filed returns after July 5 – when the ITR utility was updated – were denied the rebate on this (STCG) portion of their income while filing their returns last July. The grievance reached the Bombay High Court, which, in December 2024, directed the I-T department to allow them to revise their returns and consider their cases again.

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. However, many received intimations in February 2025, asking them to pay up the outstanding tax demand.

This, after Union Budget 2025 clarified that all the special rate incomes, including STCG under Section 111A, would not be eligible for the rebate from FY 2025-26. This section deals with the taxation of STCG from the sale of listed equity shares and equity-oriented mutual funds.

The way forward

Chartered accountants say that such taxpayers now have two options: either pay the amount or opt for litigation. “My advice is that if the amount is small, clear the dues instead of taking the litigation route. I-T is clear that the rebate will not be allowed. The Budget 2025 amendment is effective FY 2025-26, but given the department’s stand, it is unlikely that the rebate, if claimed, will be allowed for FY 2024-25 (for which returns were filed in assessment year 2025-26),” says Mayank Mohanka, Founder-Director, TaxAaram.com.

However, he believes that taxpayers who have already won their cases at the Income Tax Appellate Tribunals (ITAT) need not be bothered as their demands as deleted by ITAT stand quashed and in view of the specified threshold tax effect limits much higher than these demands, department can't pursue its appeal in High Court. Abhishek Soni, Co-founder, Tax2Win, concurs. “As per the circular, it has been clarified that if rebate under section 87A was wrongly allowed earlier on special income such as STCG, a rectification order will be issued to withdraw the rebate and the demand will be raised accordingly,” he says.

However, if the taxpayers pays this demand on or before December 31, 2025, the interest will be waived off. “Also, it is seen that many ITATs have given judgments in favour of taxpayers on this matter, but with this circular, it is clear that the I-T department is not going to allow the rebate benefit,” he adds.