Landmark Relief: Section 87A Rebate Now Applies to Short-Term Capital Gains (STCG) in New Tax Regime

 

A series of recent appellate rulings, backed by a significant Bombay High Court judgment, has delivered major tax relief to salaried individuals and small taxpayers opting for the New Tax Regime (Section 115BAC(1A)). The rulings clarify that the Section 87A rebate is permissible even when a taxpayer's income includes Short-Term Capital Gains (STCG) under Section 111A, provided their total income remains within the specified limit.

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Understanding the Core Issue

The confusion arose because the Centralised Processing Centre (CPC) initially began denying the Section 87A rebate to taxpayers whose income included STCG (taxed at a special rate of 15% under Section 111A). The CPC mistakenly assumed the rebate was applicable only to income taxed at regular slab rates.

Section 87A Rebate (New Regime)

• Eligibility: Individual taxpayers with total taxable income up to ₹7 lakh.
• Benefit: A rebate of up to ₹25,000, which effectively brings the tax liability to zero for incomes at or below ₹7 lakh.
• STCG (Section 111A): Profits from selling listed equity shares or equity-oriented mutual funds held for less than 12 months, taxed at a flat 15%.

The key legal clarification from the appellate courts is that Section 87A refers to "total income" and makes no statutory exclusion for income taxed at special rates, such as STCG under Section 111A.

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Judicial Backing and Key Takeaways

Two distinct rulings by the Commissioners of Income Tax (Appeals) (CIT(A)—one in Panchkula and another in Nagpur) confirmed the taxpayer's right to the rebate, which was further solidified by the Bombay High Court:

Judicial Point	Implication for Taxpayers
Law Over Software	The law dictates tax rights, not the software. The CPC cannot deny a statutory benefit based on system misinterpretation.
Rebate on 'Total Income'	The rebate is calculated based on the taxpayer's total income (including STCG), not individual heads of income.
Bombay High Court Ruling	The High Court mandated the Income Tax Department to update its ITR utility to correctly compute and allow the Section 87A rebate even when STCG is present in the total income.

Impact on Salaried Individuals 🧑‍💻

This decision means that a salaried individual who has taxable income of, say, ₹6 lakh (including a ₹1 lakh profit from STCG) under the New Tax Regime will now have a zero tax liability, fully utilizing the Section 87A rebate. This restores parity and ensures taxpayers who make moderate investments are not unfairly penalised.

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Action Plan for Affected Taxpayers

If the CPC previously denied your Section 87A rebate because your income included STCG, you have clear legal grounds for recourse:

1. Rectification: File a rectification request under Section 154 of the Income Tax Act, citing these favourable appellate and High Court rulings.
2. Appeal: Alternatively, file an appeal under Section 246A against the assessment order, relying on the confirmed legal position that the rebate applies to STCG.

This clarity ensures that genuine grievances are addressed and that the intent of the New Tax Regime—to offer simpler, lower-rate taxation—is fully realized for the average taxpayer.