Section 87A Rebate Allowed on Short-Term Capital Gains Under New Tax Regime: Relief for Salaried Taxpayers
Appellate rulings confirm rebate applies even when income includes STCG under Section 111A
Decision brings clarity for taxpayers earning up to ₹7 lakh under Section 115BAC (1A)
By Our Legal Reporter
New Delhi: November 01, 2025: In a significant development for salaried taxpayers, recent rulings by the Commissioners of Income Tax (Appeals) and the Income Tax Appellate Tribunal (ITAT) have confirmed that the Section 87A rebate is available even when total income includes Short-Term Capital Gains (STCG) taxed under Section 111A, provided the total income does not exceed ₹7 lakh under the new tax regime (Section 115BAC 1A).
This clarification resolves a long-standing confusion that had left many taxpayers uncertain about whether they could claim the rebate when their income included capital gains from equity shares or equity mutual funds.
What is Section 87A?
Section 87A of the Income Tax Act provides a rebate of up to ₹25,000 for resident individuals whose total income does not exceed ₹7 lakh under the new regime. This effectively means that taxpayers with income up to ₹7 lakh pay zero tax.
The confusion arose because STCG under Section 111A is taxed at a special rate of 15%, and the Centralised Processing Centre (CPC) had earlier denied rebates on such income, arguing that the rebate did not apply to special-rate income.
The Recent Rulings
Two important appellate decisions have now clarified the position:
- CIT (A), Panchkula (August 2025): Allowed rebate under Section 87A for a salaried taxpayer whose income included STCG, ruling that the rebate applies to the total tax liability, not just normal slab income.
- CIT (A), Nagpur (October 2025): Reiterated the same principle, holding that taxpayers cannot be denied the rebate simply because part of their income is taxed at a special rate.
Additionally, the ITAT Ahmedabad (August 2025) ruled that Section 87A rebate is indeed applicable on STCG under the new regime, providing relief to taxpayers who had received tax demand notices.
Why This Matters
This ruling is a big relief for salaried taxpayers and small investors:
- Clarity in law: Confirms that rebate applies to total income, including STCG.
- Financial relief: Ensures that individuals earning up to ₹7 lakh, even with capital gains, pay no tax.
- Consistency: Prevents arbitrary denial of rebate by CPC or assessing officers.
The CBDT Circular and Confusion
Interestingly, the Central Board of Direct Taxes (CBDT) issued Circular No. 13/2025 (September 2025) stating that rebate under Section 87A is not available on income chargeable at special rates, including STCG under Section 111A.
This created confusion, as appellate authorities were allowing the rebate while the CBDT was denying it. Tax experts note that judicial rulings override administrative circulars, meaning taxpayers can rely on appellate decisions until the Supreme Court or High Courts decide otherwise.
Expert Opinions
Tax professionals have welcomed the appellate rulings:
- Relief for middle-class taxpayers: Salaried individuals with modest investments in equities will not be penalized.
- Judicial consistency: Courts have upheld the principle of “just interpretation” of tax laws.
- Need for clarity: Experts urge the CBDT to issue a revised circular aligning with appellate rulings to avoid litigation.
Practical Implications for Taxpayers
- Who benefits? Salaried taxpayers and small investors with total income up to ₹7 lakh under the new regime.
- What income is covered? Salary, interest, and STCG under Section 111A.
- How much rebate? Up to ₹25,000, effectively reducing tax liability to zero.
- What to do if denied? Taxpayers can file an appeal citing recent CIT (A) and ITAT rulings.
Example Case
Suppose a salaried taxpayer earns:
- Salary: ₹5,00,000
- STCG (equity shares): ₹1,50,000
- Total income: ₹6,50,000
Under the new regime, tax liability would include 15% on STCG. However, with Section 87A rebate, the entire tax liability is wiped out, ensuring no tax is payable.
Broader Context
The ruling is part of a larger trend where courts are interpreting tax laws in favour of fairness and simplicity. With the government promoting the new tax regime as the default option, clarity on rebates and exemptions is crucial for taxpayer confidence.
Conclusion
The confirmation that Section 87A rebate applies to STCG under the new tax regime is a landmark relief for salaried taxpayers and small investors. While the CBDT’s circular created temporary confusion, appellate rulings have restored clarity and fairness.
Going forward, a larger judicial pronouncement or legislative amendment may be needed to settle the issue permanently. For now, taxpayers earning up to ₹7 lakh—including STCG—can breathe easy knowing that their tax liability remains zero under Section 87A.
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