Tax relief 2025: CBDT offers relief on Section 87A rebate cases; check details on penal interest

The Central Board of Direct Taxes (CBDT) has issued a new circular clarifying the treatment of Section 87A rebates claimed against income taxed at special rates, such as short-term capital gains (STCG) on equities. The move seeks to address widespread taxpayer confusion and provide limited relief to individuals who have received tax demand notices for such claims.

In Circular No. 13/2025, the Board said that taxpayers who wrongly availed the Section 87A rebate on special-rate income but settle the resultant tax demands by December 31, 2025, will not be charged penal interest under Section 220(2) of the Income Tax Act. However, those who fail to clear their dues by the deadline will still face interest charges.

Section 87A

Under the New Tax Regime, individuals with taxable income up to Rs 7 lakh can claim a rebate of up to Rs 25,000 under Section 87A, effectively making their tax liability zero. The contentious point has been whether this rebate extends to special-rate incomes like STCG on equities or long-term capital gains (LTCG).

While slab-based income qualifies for the rebate, special-rate incomes are taxed separately under Section 115BAC(1A). CBDT has now clarified that such incomes do not fall under the scope of Section 87A rebate.

The confusion intensified after July 5, 2024, when the income-tax return (ITR) utility was modified to disallow rebates on special-rate income. However, several taxpayers had already filed returns claiming rebates on STCG and similar incomes. Many of these returns were initially processed and accepted, only to later trigger rectification notices and fresh tax demands.

Circular details

The CBDT noted that in cases where rebates were wrongly granted, rectifications are mandatory. This would result in additional tax demands. Normally, non-payment within the prescribed period would attract 1% monthly interest under Section 220(2).

To mitigate hardship, the Board has allowed full waiver of such interest if taxpayers settle their dues by December 31, 2025. “If the payments of such demands raised are delayed then the same are liable for charging of interest… In order to mitigate the genuine hardship… the Board directs that the interest payable shall be waived in such cases where the payment is made on or before 31.12.2025,” the circular stated.

Impact on taxpayers and litigation

Tax experts say the relief is partial, as the core dispute over applicability of the rebate remains unresolved. Mihir Tanna, Associate Director, Direct Tax at S.K. Patodia & Associates LLP, told the Economic Times: “The circular gives marginal relief that even if the taxpayer doesn’t pay the demand within 30 days of receiving the tax notice, interest at 1% per month will not be payable. However, the main issue of whether Section 87A applies to special-rate incomes continues to be litigated.”

The matter has seen conflicting court rulings. While the Bombay High Court restricted the rebate to normal incomes, several lower courts allowed claims on special-rate income provided the total taxable income was below ₹7 lakh. With CBDT’s latest clarification, experts expect litigation to persist as affected taxpayers may continue to challenge the interpretation. The circular effectively closes the door on Section 87A claims against special-rate income but softens the blow by waiving penal interest for those willing to comply. For many small investors who relied on the rebate last year, the relief is limited to avoiding additional interest charges — not the tax itself.