ITR Filing: ITAT Ruling Opens Window For Tax Break - Rebate On Short-Term Capital Gains

There has been certain ambiguity on whether small taxpayers' special rate income, especially short-term capital gains tax is going to be eligible for the rebate under section 87A under the new tax regime, and this discussion has come up again in recent times.

Income Tax Appellate Tribunal's Order

The Income Tax Appellate Tribunal (ITAT) had recently passed an order, which has recently re-opened the debate and it has created a window of opportunity for such taxpayers to claim a rebate while filing their returns for the financial year 2024-25 (or assessment year 2025-26).

According to the Finance Act for FY26, the 87A rebate on incomes up to Rs 12 lakh (which was Rs 7 lakh earlier) under the new tax regime is not applicable to special rate incomes such as short-term capital gains made on the sale of equity shares or equity-oriented mutual fund units. However, the case was about the previous financial year.

A taxpayer, Jayshreeben Jayantibhai Palsana, had filed an ITR declaring a total income of Rs 4,27,635 for FY 2023-24 (AY 2024-25), comprising short-term capital gains under section 111A of Rs 3,79,559, long-term capital gains of Rs 38,840 under section 112A and income from other sources of Rs 9,236.

She then revised her return before December 31, 2024, with her total tax payable amounting to a total of Rs 13,320.

Since her total income was below Rs 7 lakh, she claimed a rebate of Rs 13,320 under section 87A, which allows a rebate of up to Rs 25,000 on incomes of up to Rs 7 lakh (limit increased to Rs 12 lakh from FY26).

However, the income department and later the Commissioner of Income Tax - Appeals (CIT-A) denied the rebate claim, after which she approached ITAT-Ahmedabad, which overturned the Bengaluru CPC and CIT(A) orders and ruled in her favour.

The order also stated that there is no bar either in section 87A or section 111A for denial of rebate on tax payable on short-term capital gains arising from transfer of listed equity shares taxable at special rates under section 111A for the financial years preceding FY26.

What Is The Precedent For FY 2024-25?

Palsana's case was about AY 2024-25, but can the same be applied to a claim section 87A rebate on the short-term capital gains component of their income for AY 2025-26?

While there are different opinions on this, in January and February 2025, aggrieved taxpayers and their consultants had filed appeals against the income tax department's intimations to taxpayers and denial of rebate under the new tax regime.

This was followed by the Bombay High Court's order directing the Income Tax Department to allow taxpayers to revise their returns and consider the cases of those who filed their return post July 5, 2024 - when the ITR utility was updated - and were denied the rebate on this (STCG) portion of their income.

After this, a 15-day window was created to allow such taxpayers to revise their ITR between January 1 and January 15, 2025 (ordinarily, the deadline for filing belated to revise returns is December 31) on the official e-filing portal. Many taxpayers revised their ITR hoping to get a rebate on their STCG income.

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