Payback the Section 87A rebate amount claimed against capital gains, says the tax demand notice; What are your options?
Many taxpayers are receiving income tax demand notice due to denial of Section 87A tax rebate on special rate income like Short Term Capital Gains (STCG) for ITRs of FY 2023-24 (AY 2024-25). This issue, which was once thought to be resolved after the Bombay High Court judgement on January 24, 2025, is once again back to haunt small taxpayers.#sr_widget.onDemand p, #stock_pro.onDemand p{font-size: 14px;line-height: 1.28;} .onDemand .live_stock{left:17px;padding:1px 3px 1px 5px;font-size:12px;font-weight:600;line-height:18px;top:9px} #sr_widget.onDemand .sr_desc{margin:0 auto 0;} #sr_widget.onDemand .sr_desc{color: #024d99;margin-top:10px;} #sr_widget.onDemand .crypto .live_stock .lb-icon{8px 6px 5px 3px !important} #sr_widget.crypto.onDemand a.text{border-bottom:1px solid #ccc;padding-bottom:5px;display:block;width:100%} #sr_widget.onDemand .sr_desc .text p, #stock_pro.onDemand .sr_desc .text p{font-size:12px;font-weight:400;}
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Section 87A tax rebate is given to taxpayers with a total income up to Rs 5 lakh under the old tax regime (up to Rs 12,500) or up to Rs 7 lakh under the new tax regime (up to Rs 25,000) for FY 2023-24 (AY 2024-25). Due to this tax rebate under Section 87A the net tax liability becomes nil for these income levels.
This means either you have to make payment as per the notice or prepare to contest this notice in a court of law.
There could be a third alternative of filing a grievance and reprocessing request but experts are not sure whether the tax department will grant this alternative method’s benefits or not. This is because the Income Tax Department is yet to issue any clarification about why Section 87A tax rebate is not being given on special rate income like STCG.
What is the issue for which tax demand notices are being sent?
This issue started from July 5, 2024 when the Income Tax Department ITR utility software was modified to prevent any taxpayer to claim Section 87A tax rebate on special rate income like STCG. From July 5, 2024, taxpayers couldn't claim Section 87A tax rebate on special rate income. Those who filed their ITR before this date could claim Section 87A tax rebate on special rate income. It is these taxpayers who could claim Section 87A tax rebate on special rate income are being issued a tax demand notice since February 24, 2025.
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The image below shows how the ITR utility software’s schema was modified on July 5, 2024, the date from which the entire Section 87A tax rebate issue started.
Income Tax UtilitySource: Income Tax Department Website as of February 26, 2025Why are tax demand notices denying Section 87A tax rebate being sent now?
The due date to file an original ITR for FY 2023-24 (AY 2024-25) was July 31, 2025. The extended deadline to file a belated or revised ITR for FY 2023-24 (AY 2024-25) was January 15, 2025. Experts say the reason behind these tax demand notices being sent now is many revised ITRs claiming Section 87A tax rebate on STCG was filed on or before January 15, 2025. These ITRs are now processed.“The ITRs are still being processed with tax demand if 87A tax rebate was claimed on STCG since this issue is still unsettled,” says Chartered Accountant Prakash Hegde.
Chartered Accountant Ashish Karundia says, "The tax department has started sending demand notices again to taxpayers, rejecting the 87A rebate on short-term capital gains taxed at a special rate.
“Many assessees have now received Intimation Orders on 24.02.2025 for demands - wherein Rebate under Section 87A has been disallowed against Special rate incomes during processing of the ITRs but same was duly allowed by the Utility while filing the ITR,” says Chartered Accountant Himank Singla, partner, SBHS & Associates.
What did Bombay High Court say about this Section 87A issue on January 24, 2025?
The Bombay High Court in its judgement dated January 24, 2025, asked the tax department why did they disable Section 87A tax rebate claim option on the utility since July 5, 2025.“The facility to raise a claim, which was very much available till 5 July 2024, could not have been abruptly discontinued simply because the revenue officials, acting in their administrative capacities, felt that such a claim was untenable. This is almost like some Court registry declining to accept a filing because, in the opinion of the filing clerk, the suitor’s suit was untenable on merits. The access to justice cannot be denied in this manner,” said the Bombay High Court.
Bombay High Court ordered the Income Tax Department to allow taxpayers to claim Section 87A tax rebate on special rate income like STCG but left the decision to grant it or not up to examination by judicial authorities.
What should taxpayers do now?
To add to the confusion, Budget 2025 has amended the language of Section 87A tax rebate and now clarified it is not available in special rate incomes. But this amendment is applicable from April 1, 2025, and is not applicable with retrospective effect. This is the reason why experts question the legality of such a tax demand notice for FY 2023-24 (AY 2024-25)“…such rebate of income-tax is not available on tax on incomes chargeable at special rates (for e.g.: capital gains u/s 111A, 112 etc.),” said explanatory memorandum of Budget 2025.
We have asked various experts about what taxpayers should do now, here’s what they said:
CA Prakash Hegde: “I suggest that small taxpayers should not fight these small amounts of tax demands raised due to denial of Section 87A tax rebate on special rate incomes like STCG. Professional bodies and law firms should take up this issue with the courts. Like the Chamber of Tax Consultants (CTC) raised this issue in the Bombay High Court, others should do this. The Bombay High Court judgment on this issue that was taken up by the CTC was primarily focused on making the utility software correct to allow the claims. Allowing such claims while processing the ITR was not the main point. The ITRs are still being processed with tax demand if 87A tax rebate was claimed on STCG since this issue is still unsettled.”
Rahul Jain, Director, Khaitan & Co: The judgment of Bombay High Court enabled the taxpayers to claim the rebate in the tax returns but did not adjudicate on the validity of such claims. Once the rebated is claimed, the tax department may assess this independently and in case of any objections, the taxpayers may put forth their legal arguments in support of their claims. Any adverse inference by the tax department may be challenged before the appropriate appellate authorities. Taxpayers may evaluate the next steps depending on the amount involved and the litigation cost.
Chartered Accountant Ashish Karundia says: "The taxpayers who filed a rectification request against the initial tax demand notice have had no success and tax demand remains unchanged despite the processing of the rectification application. It seems there is no respite for the taxpayer even though the income tax return utility was modified permitting the taxpayers to make an 87A rebate claim. The taxpayers are left with the option of either appealing their case before the CIT (Appeals) or paying the tax demand. In a similar case decided in November 2024, the CIT (Appeals) in Pune allowed the taxpayer's appeal against the disallowance of the 87A rebate, subject to factual verification of the claim."
CA Bimal Jain, founder, A2Z Taxcorp LLP: “These taxpayers who have been issued tax demand notices due to denial of Section 87A tax rebate on special rate incomes like short term capital gains should first file a rectification request and then lodge a grievance with the tax department. CBDT should take cognizance of this issue and process ITRs with Section 87A tax rebate on special rate income like STCG, rather than issuing tax demand notices for this. Also, I think CBDT should issue refunds to taxpayers who have paid the tax demand amount in response to this notice, since it's unfair. Taxpayers who got this tax demand notice due to denial of Section 87A tax rebate on STCG income can also choose the litigation route but should know choosing this route requires resources.”
Chartered Accountant Hardik Kakdiya, president, Chartered Accountant Association Surat (CAAS): While the court acknowledged the correct interpretation, but instead of giving clarity to taxpayers, it engaged in limiting the impact dependent upon the Assessing Officer (AO).Pursuant to the interpretation of Court with respect to Section 87A tax rebate, the demand was illegal and ought to have reversed.
The department despite having knowledge of the illegality continues to engage in issuing demand notices which shall anyways be allowed at the first appeal stage. The tax department is also well aware that taxpayers wont engage into litigation for a small amount. All this is despite the knowledge of the department about the Cardinal rule enshrined in the Constitution under Article 265 - No Taxes to be levied except without the Authority of Law.
A Government Department itself is engaging in an unconstitutional work, while it could had easily reprocessed all demands giving effect to the correct position uniformly even without taxpayers filing an appeal. This is the height of Bureaucracy under the garb of overly learned interpretation of law burden whereof is crushing the honest taxpayer.
CA Himank Singla, partner, SBHS & Associates: The Bombay High Court judgment dated January 24, 2025, clarified that procedural consistency is crucial. Once the tax department's own systems have allowed a claim, disallowing it later without due process is legally untenable.
Disallowance of Section 87A tax rebate claims on special rate income like STCG, without notice contravening the principle of audi alteram partem (hear the other side), as highlighted by the Bombay High Court.
Despite the January 21, 2025, judgment, Rectification Orders continue to disallow the rebate, raising questions on departmental compliance. Taxpayers are compelled to pursue appeals against Orders under Sections 143(1) or 154, incurring unnecessary costs and delays amid all the confusion. Taxpayers will need to file appeals online before the Commissioner of Income Tax (Appeals) [CIT(A)] under Section 246A by presenting the Bombay High Court ruling as supporting jurisprudence.
In my view, the Income Tax Department must issue a clear circular or notification clarifying its stance on Section 87A rebate applicability on special rate incomes for AY 2024-25. Such clarification should reference the Bombay High Court judgment to ensure uniform compliance. The ITR Utility should be promptly updated to reflect the correct treatment of Section 87A rebates. In case the Department fails to provide relief through rectification or appeal processes, writ petitions may be filed before the jurisdictional High Court, invoking Article 226 of the Constitution of India for violation of fundamental procedural rights.
Mihir Tanna, associate director, S.K Patodia LLP, says: In my view, relevant income tax provisions are contrary to each other. Only Section 112 (tax on income from long-term capital gain) specifies that Section 87A rebate is not available. Thus, in my view one more round of litigation will continue. Considering uncertainty on outcome of litigation, taxpayers are advised to pay tax as per intimation. Considering litigation cost and low amount of relief from Section 87A tax rebate, I think only tax professionals will prefer to challenge the said issue for self or associations working for the interest of the public may prefer the route of litigation.
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This story originally appeared on: India Times - Author:Faqs of Insurances
