Income tax department is sending demand notices for claiming rebates to those with capital gains

Breaking: Income-tax department is sending demand notices for claiming rebates to those with capital gains.

Here’s all about the issue and what you need to do

[1] History

The ITR utility was allowing individuals to claim a rebate u/s 87A until 5th July, 2024.

However, the utility disallowed the rebate claim to those having short-term capital gains u/s 111A.

[2] Bombay High Court Judgement

A writ was filed before the Bombay HC to allow taxpayers to self-assess their income.

The petitioners claimed that it is the constitutional right of the taxpayers to self-assess their incomes.

IT Dept can later dispute their positions.

[3] IT Dept sending notices

The belated ITR deadline was extended to allow this.

Now the IT department is sending notices to those who claimed this rebate.

What to do now?

[4] What to do now?

The returns can’t be revised now. You now have the option of reprocessing your return under rectification.

However, interest may increase if the rectification order is not in your favour.

[5] What is the income-tax view?

As per the Memorandum to Finance Bill, 2025, the department’s view is that rebate isn’t allowed for incomes taxable at special rates including:

a) Short-term capital gains u/s 111A at 20%, and
b) Long-term capital gains u/s 112A at 12.5%.

[6] Alternate argument

If this matter goes to court for ITRs filed for up to FY25, then taxpayers may argue that rebate is allowed even if income is taxable u/s 111A

Why? It is because the law mentions clearly when they intend to not allow rebate. Section 112A excerpt:

The same argument was given by petitioners while asking for ITR utility to provide the option to taxpayers to claim rebate u/s 87A.