Income Tax Notice: Section 87A rebate, a major provision in the Income Tax Law of India, has created confusion among taxpayers, especially those with capital gains income.
Recently, Budget 2025 has increased the rebate limit to Rs 12 lakh under the new tax regime. But there is still no clarity on whether this applies when a taxpayer has both regular income (such as salary) and special rate income (such as STCG, short-term capital gains).
What is the problem?
Under the new regime, taxpayers with total income up to Rs 7 lakh can claim exemption, which will reduce their tax liability to zero.
However, according to experts, it is not clear whether this will apply to special rate income like capital gains. Yeshu Sehgal, head of tax markets at AKM Global, said that there is a problem in the application of Section 87A rebate, especially for taxpayers who have both regular income and special rate income like STCG.
There is confusion over whether the rebate should be calculated on the total income or only on the regular income portion.
The Central Board of Direct Taxes (CBDT) has excluded short-term capital gains (STCG) and long-term capital gains (LTCG) from exemptions while processing returns through the ITR utility portal, due to which many taxpayers are being sent tax notices.
Gaurav Jain, direct tax partner, Forvis Mazars, said that the CBDT has taken suo motu cognizance of the ITR utility portal and has refused to give the benefit of exemption under section 87A on such short-term and long-term capital gains, which has led to a controversy.
When is the exemption given
- When normal income is taxed as per slab rates.
- Long-term capital gains under section 112 (on capital assets other than listed equity shares and equity mutual funds).
- Short-term capital gains under section 111A (15% tax on listed equity shares and equity mutual funds).
When exemption is not given
Long-term capital gains under section 112A (10% tax on equity shares and equity mutual funds).
Jain said that some taxpayers believe that exemption under section 87A should be available on total income including capital gains. Some CIT(A) rulings have supported this. Until the matter is resolved legislatively or judicially, taxpayers should oppose the denial and file an appropriate reply.
What should taxpayers do when they receive a notice?
- Review the notice – Check whether the exemption claimed is as per the tax provisions.
- Consult a tax expert – Consult a Chartered Accountant (CA) to validate the claim.
File a rectification or appeal – If wrongly rejected, file a rectification request or contest the notice.
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