The ongoing confusion surrounding the Section 87A rebate claims has resurfaced once more. Following the revisions of their income tax returns (ITRs) in January 2025, as mandated by the Bombay High Court, a significant number of taxpayers—mainly those with total incomes falling below Rs 7 lakh—are now receiving demand notices from the Income Tax Department.

Tax professionals indicate that these notices, which are issued under Section 143(1) of the Income Tax Act, are denying the Section 87A rebate for income taxed at special rates, such as Short-Term Capital Gains (STCG) taxed at 15% under Section 111A, even when claimed within the designated revision period.

Context: Confusion Surrounding the 87A Rebate

In the fiscal year 2023-24 (assessment year 2024-25), the rebate under Section 87A was accessible to taxpayers with total incomes up to Rs 5 lakh under the old tax regime and up to Rs 7 lakh under the new tax framework. However, there has been an ongoing debate regarding the applicability of this rebate to income categorized under special rates, such as STCG.

After the update of the Income Tax Return (ITR) utility on July 5, 2024, taxpayers found themselves unable to claim the rebate on STCG income under the new tax regime when they attempted to file or revise their returns. Following a series of legal disputes, the Bombay High Court ordered the Income Tax Department in December 2024 to grant a revision window, which was facilitated from January 1 to January 15, 2025.

Despite the sincere efforts to revise their returns, many taxpayers are now receiving demand notices that disallow the very rebate they worked hard to claim through the revision process.

Chartered Accountants Assist in Filing Appeals with CIT(A)

Numerous Chartered Accountants have confirmed that they are helping clients in submitting appeals to the Commissioner of Income Tax (Appeals) [CIT(A)].

“Taxpayers have a 30-day window from the date they receive the intimation to electronically file Form 35 via the e-filing portal. It’s essential to attach supporting documents like the filed returns, demand notices, computation sheets, and the Bombay High Court judgment,” recommended a senior Chartered Accountant.

Some appeals, particularly those from regions like Gujarat and Mumbai, have already yielded favorable results for taxpayers, offering a fleeting sense of optimism. However, Chartered Accountants emphasize that each case will be evaluated on its own merits.

Taxpayers Facing Challenges

Individuals who filed before the July 5 utility update and were previously granted the rebate are not exempt from receiving demands. Experts point out that suo-moto rectification orders are being issued, reversing previously approved claims and imposing new demands—even for minor amounts.

“The tax utility was modified following court orders, and taxpayers revised their returns within the prescribed timeline. Yet, they continue to encounter demands. It’s disheartening,” expressed another tax consultant.

New Budget 2025 Clarification Exacerbates Confusion

The Union Budget 2025 specified that, starting from FY 2025-26, special rate incomes, such as STCG under Section 111A, will no longer qualify for the rebate. However, this restriction does not apply retroactively to FY 2023-24, adding to the frustrations of taxpayers.

Recommended Actions for Taxpayers

  • Verify if 30 days have elapsed since receiving the intimation under Section 143(1).
  • Submit Form 35 online to contest the demand, particularly if the tax amount is substantial.
  • Include necessary documents, such as computation sheets and legal references.

For smaller amounts, some professionals suggest that paying the demand may be more efficient in avoiding lengthy legal processes. Nevertheless, for larger sums or claims based on principle, pursuing an appeal is strongly encouraged.

The ongoing saga of rebate denials continues to distress diligent taxpayers. As appeals accumulate, all attention now turns to the appellate authorities to provide clarity and relief in a situation that has become a significant test case for administrative fairness and legal interpretation within India’s tax system.