ITAT Allows Full Section 87A Rebate on Short Term Capital Gain for AY 2025-26:

The assessee is Mrs. Renu Singla who filed her return for AY 2025-26 declaring total income of Rs 5,38,610, comprising income from house property, other sources and Short Term Capital Gain taxable under Section 111A. The total income considered for the rebate was below the Rs 7 lakh threshold under the new tax regime.

While processing the return under Section 143(1), the CPC restricted the assessee’s Section 87A rebate from Rs 25,000 to Rs 3,500, by excluding the tax attributable to the Short Term Capital Gain component. This resulted in a demand of Rs 25,840 including interest. The CIT(A) confirmed the intimation.

The Tribunal observed that the restriction on Section 87A rebate in respect of income taxable at special rates was introduced by the Finance Act, 2025 only with prospective effect from AY 2026-27. The Tribunal noted that the first proviso to Section 87A, inserted by the Finance Act, 2023 with effect from AY 2024-25, provided the rebate to a resident individual under Section 115BAC(1A) whose total income did not exceed Rs 7 lakh, without excluding income taxable under Section 111A.

The Tribunal relied upon the decision of the ITAT Ahmedabad  in Jayshreeben Jayantibhai Palsana Vs ITO Case, which held that the restriction concerning special-rate income was introduced only by the Finance Act, 2025 prospectively from AY 2026-27 and that an explanatory memorandum could not override the statutory language. Accordingly, the Tribunal set aside the intimation issued under Section 143(1), allowed the full Section 87A rebate of Rs 25,000 and deleted the demand of Rs 25,840 including interest. The assessee’s appeal was allowed.