Taxpayers and CAs contest Income Tax Notices on Rebate Claims

After the income tax department sent demand notices to taxpayers, primarily those with total incomes of less than Rs.7 lakh, who revised their income tax returns in January 2025 to claim the refund, several chartered accountants moved the tax appellate authority for a decision.

Rebate Denial Saga Continues

In July 2024, several taxpayers with’ special rate’ income, such as short-term capital gains (STCG) tax at 15% (for the financial year 2023-24 – that is assessment year 2024-25), claimed the rebate under section 87A because their total income was less than Rs.7 lakh. The rebate provisions of the Income Tax Act of 1961, with limits of Rs.5 lakh and Rs.7 lakh under the old and new tax regimes, respectively, in FY24 (assessment year 2024-25), reduce the effective tax burden to zero.

However, those who submitted returns after July 5 – when the ITR software was updated—were denied the rebate on this (STCG) component of their income while filing their returns last July. The grievance reached the Bombay High Court, which in December 2024, asked the IT department to enable them to modify their returns and consider their cases again. As a result, a 15-day window was created on the official e-filing platform allowing such taxpayers to update their ITR between January 1 and January 15, 2025 (the regular deadline for filing tardy or revised returns is December 31). Many did, intending to receive a rebate on their STCG revenue as well.

Meanwhile, on February 1, the Union Budget 2025 stated that all special rate incomes, including STCG under Section 111A, would be ineligible for the refund beginning in the financial year 26. This section discusses the taxes on STCG from the sale of listed equity shares and equity-oriented mutual funds.

Notices to all Taxpayers with Rebate Claim

Taxpayers who revised their returns before January 15, 2025, in the hopes of receiving the rebate have now received demand notice, leaving them disappointed.

In fact, even individuals who submitted their returns before July 5 and were granted a rebate under the new regime, even those with special rate income, received similar notices.

Way Ahead

Taxpayers and CAs have 30 days from receipt of the demands to file such appeals in form 35; in most circumstances. In certain cases, such as in Gujarat and Mumbai, the verdicts have been in favour of taxpayers.

Many of taxpayers continue to receive such notices; thus, this is a ongoing issue. If the amount is large, appeals may be filed. However, where the amount to be paid is minor, we advise taxpayers to simply pay it.