Income Tax update: CBDT waives interest on wrong Section 87A rebate cases. Pay revised tax by Dec 31

The Central Board of Direct Taxes (CBDT) has stepped in to ease the burden on small taxpayers who unexpectedly faced fresh tax demands after errors in processing the Section 87A rebate were corrected.

Under current rules, Section 87A of the Income Tax Act provides a rebate for taxpayers with taxable income up to ₹7 lakh, effectively reducing their liability to zero. However, this rebate only applies to income taxed at normal slab rates, not to special-rate incomes such as short-term or long-term capital gains, lottery winnings, or other specified categories.

Due to system glitches and incorrect processing, some taxpayers were wrongly granted this rebate even on special-rate incomes. When rectifications were made, fresh tax demands were generated — shocking many who had earlier received refunds or seen lower liabilities.

CBDT’s relief measure

Acknowledging the hardship, the CBDT issued a circular under Section 119 granting conditional relief:

• No interest if paid by December 31: Taxpayers who clear their revised dues by this date will not be charged interest under Section 220(2).
• Interest applies after deadline: Payments made after December 31, 2025 will attract interest from the original due date until settlement.

This effectively gives taxpayers a three-month window to settle dues without additional financial burden.

What is Section 220(2)

Section 220(2) mandates interest on late payment of tax. Normally, if dues are not cleared within 30 days of a demand notice, interest accrues until full payment. In this case, CBDT has conditionally waived the interest considering that the fresh demands arose from system corrections, not deliberate under-reporting.

Why it matters

• Unexpected shock: Many taxpayers had assumed their liabilities were cleared, only to face revised demands.
• Relief for small taxpayers: Waiving interest prevents undue financial stress for those with limited incomes.
• Push for compliance: By setting a clear cut-off, CBDT encourages prompt settlement of dues.

Key takeaways for taxpayers

1. Who benefits? Small taxpayers wrongly allowed Section 87A rebate on special-rate income.
2. What to do? Pay the revised demand before **December 31, 2025.
3. What if delayed? Interest under Section 220(2) will be charged from the original due date.
4. Relief nature: One-time waiver, not applicable to other pending dues.

Tax experts see this as a pragmatic move that balances compliance with fairness. While taxpayers still need to bear the corrected liability, the waiver of interest ensures they are not penalized for system-driven mistakes.