Section 87A Rebate Claimed on Capital Gains? What to Do If You Get a Tax Demand Notice?:

Section 87A Rebate Claimed on Capital Gains? What to Do If You Get a Tax Demand Notice? Most of the taxpayers are getting income tax demand notices because their Section 87A rebate claims on special rate income, such as Short-term Capital Gains, are being denied for IRTs filed for the financial year (FY) 2023-24 (AY 2024-25). This issue was expected to be settled after the Bombay High Court judgment on January 24, 2025. This issue was expected to be settled after the Bombay High Court's judgment on January 24, 2025, but it has come up again, causing trouble for small taxpayers once again. Section 87A provides a tax rebate which helps reduce tax liability under both the old and new tax regimes. Before 5 July, taxpayers could claim this rebate in case of special-rate incomes like short-term capital gains. However, after July 5, the tax department changed the tax filing system, preventing taxpayers from claiming the rebate on short-term capital gains under Section 87A. Under Section 87A, taxpayers do not have to pay income tax if their total income is up to Rs. 5 lakh under the old tax regime (saving up to Rs. 12,500) or up to Rs. 7 lakh under the new tax regime (saving up to Rs. 25,000) for FY 2023-24 (AY 2024-25). This rebate reduces their tax liability to zero at these income levels. There could be one additional choice in the form of filing a grievance and seeking reprocessing of the ITR. But the experts are not certain whether the tax department would accept this as a choice. This is due to the fact that the Income Tax Department has not yet indicated why the Section 87A rebate is not being granted on special income such as Short-Term Capital Gains (STCG). This issue began on 5 July 2024, when the Income Tax Department updated its ITR filing software to block taxpayers from claiming the Section 87A rebate on special income like Short-Term Capital Gains (STCG). From the above date, taxpayers were not eligible to claim this rebate on such income. But taxpayers who had already filed their ITR up to July 5, 2024, were provided with the freedom of claiming the rebate. These early-filing taxpayers are now being issued tax demand notices from 24 February 2025. The deadline for filing the original ITR for FY 2023-24 (AY 2024-25) was 31 July 2025. If the person has already missed the same, it is not too late to file a late or amended ITR on or before 15 January 2025. Experts say the recent notices for tax demands are being issued as several taxpayers had availed of the Section 87A rebate on Short-Term Capital Gains (STCG) when they were submitting revised ITRs up to the 15 January 2025, deadline. Now that these ITRs have been processed, tax notices are being issued. In its judgment dated 24 January 2025, the Bombay High Court questioned the tax department about why they removed the option to claim the Section 87A rebate in the tax filing utility on 5, July 2025. The Bombay High Court said, "The option to claim this benefit was available until July 5, 2024, and it could not have been suddenly stopped just because tax officials, in their administrative roles, felt it was not valid. This is similar to a court clerk refusing to accept a case simply because they believe it will not succeed. Denying access to justice in this way is not acceptable." Adding to the uncertainty, Budget 2025 has rephrased Section 87A, explicitly declaring that the rebate cannot be claimed on special rate incomes. However, the amendment is effective from April 1, 2025, and does not affect previous years. Due to this, experts are doubting the validity of the tax demand notice for FY 2023-24 (AY 2024-25).