Section 87A Rebate Confusion: Why Taxpayers with Capital Gains Are Receiving Notices

The Section 87A rebate, a key provision in India’s income tax law, has created confusion among taxpayers, especially those with capital gains income. While Budget 2025 raised the rebate limit to ₹12 lakh under the new tax regime, uncertainty remains about whether taxpayers with capital gains can claim it.

Many taxpayers are now receiving income tax notices due to differences in how the Income Tax Department (ITD) and experts interpret the rebate.

Does the Section 87A Rebate Apply to Capital Gains?

Under the new tax regime, taxpayers with a total income up to ₹7 lakh are eligible for the 87A rebate, reducing their tax liability to zero.

However, the application of the rebate on special rate incomes, like short-term and long-term capital gains (STCG and LTCG), is unclear.

“There is confusion regarding whether the rebate applies to total income or only to regular income taxed at slab rates,” said Yeeshu Sehgal, Head of Tax Markets, AKM Global.

The Central Board of Direct Taxes (CBDT) has excluded certain capital gains from rebate eligibility when processing returns via the ITR Utility portal, leading to tax demand notices for many taxpayers.

When Is the 87A Rebate Allowed or Denied?

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Allowed on:

• Normal income taxed at slab rates
• Long-term capital gains (LTCG) under Section 112 (excluding listed equity shares & equity mutual funds)
• Short-term capital gains (STCG) under Section 111A (taxed at 15% on listed equity shares & mutual funds)

Not allowed on:

• LTCG under Section 112A (on listed equity shares & mutual funds taxed at 10%)

“CBDT has suo-moto denied the rebate on capital gains in the ITR Utility portal, leading to confusion and tax notices,” said Gaurav Jain, Partner, Direct Tax, Forvis Mazars.

What Should Taxpayers Do If They Receive a Tax Notice?

If you receive a demand notice related to the Section 87A rebate:

Review the notice – Check if the rebate claim aligns with the tax provisions.
Consult a tax expert – Seek advice from a Chartered Accountant (CA) to validate your rebate eligibility.
File a rectification or appeal – If wrongly denied, submit a rectification request or contest the notice with proper documentation.

“Rebate is allowed on normal income but not on certain capital gains. Taxpayers must carefully analyze their income before claiming it,” said CA Ruchika Bhagat, MD, Neeraj Bhagat & Co.

Will There Be a Resolution?

Some CIT(A) rulings have favored taxpayers, arguing that the rebate should be applied on total income, including capital gains. Until a clear legislative or judicial resolution is reached, experts advise filing responses and contesting denials if necessary.

With only two days left to file revised income tax returns (ITR) for FY 2023-24, taxpayers must be cautious while claiming the 87A rebate to avoid unwanted tax notices.

Stay Updated on Income Tax Changes

For more updates on Section 87A, capital gains taxation, and income tax laws, stay tuned.