Section 87A rebate on Short-Term Capital Gains? ITAT Ahmedabad ruling fuels hope

The Income Tax Appellate Tribunal (ITAT) Ahmedabad's recent ruling has brought a significant development for taxpayers seeking relief under Section 87A for short-term capital gains (STCG) taxation. This decision indicates that Section 87A does not explicitly exclude STCG, offering potential rebates for the fiscal year 2024-25. However, complexities remain, as the rebate's future availability could face further judicial scrutiny.

The tribunal noted that Section 87A, in its present form, does not distinguish between normal income and special rate income, nor does it contain an explicit exclusion for STCG.

This verdict has revived the debate that began on July 5, 2025, when the tax department updated its ITR processing software to block Section 87A rebate claims against STCG. The change triggered disputes, court cases, and eventually an extension of the ITR filing deadline. With the ITAT ruling, many taxpayers now see renewed scope for relief.

However, the relief may be short-lived. From April 1, 2025, as clarified in Budget 2025, the Section 87A rebate will no longer apply to any special rate income, including STCG. For FY 2024–25, though, there is no explicit statutory bar, leaving room for interpretation in favour of taxpayers.

Tax expert Dr. Suresh Surana told the Economic Times that the taxpayers who received demand notices due to the denial of Section 87A rebate on short-term capital gains (STCG) for AY 2024–25 may now seek relief following the Ahmedabad ITAT ruling.

Many disallowances arose from the CPC system, which auto-restricted rebates on special rate income. The Tribunal clarified that Section 87A, as applicable for AY 2024–25, imposes no such restriction. Taxpayers can file a rectification under Section 154 or appeal before the Commissioner (Appeals), relying on the ITAT and Bombay High Court orders. Case-specific facts, however, require a tailored litigation strategy.

Budget 2025 changes

The explanatory memorandum to Budget 2025 proposed major changes effective from AY 2026–27:

The rebate limit under Section 87A will rise from Rs 25,000 to Rs 60,000.

The qualifying income threshold will increase from Rs 7 lakh to Rs 12 lakh under the new tax regime.

A new proviso will ensure the rebate applies only against income taxed at normal slab rates, explicitly excluding special rate income such as capital gains under Sections 111A and 112.

This means that while the rebate becomes more generous, it cannot be used to offset tax on capital gains from the next assessment year onwards.

What happens next

Taxpayers may now consider filing an Order Giving Effect (OGE) request to implement the ITAT’s decision in specific cases. Tax expert Dr. Suresh Surana told the Economic Times that once the OGE is issued, the assessee in that case will receive the rebate. However, such relief is case-specific and not a binding precedent for others.

Surana cautions that while the ITAT’s reasoning carries persuasive value, the Revenue can still challenge the ruling before the High Court. Until then, claims for Section 87A rebate on STCG may continue to face resistance from the Centralised Processing Centre (CPC) or assessing officers.

In essence, taxpayers may benefit for FY 2024–25, but the window closes permanently from AY 2026–27.