Section 87A Rebate Allowed on STCG Taxed Under Section 111A for AY 2025-26: ITAT Ahmedabad Ruling

Section 87A Rebate for Individuals: The Basics

Section 87A of the Income Tax Act, 1961 offers relief to resident individual taxpayers whose total income is below a specified threshold in an assessment year. For Assessment Year (AY) 2025–26, this threshold is ₹7,00,000. The maximum rebate is ₹25,000, reducing or fully eliminating income tax liability for eligible assessees.

Special Tax Rates and Section 111A

Section 111A imposes a concessional tax rate (15%) on short-term capital gains (STCG) from equity shares or equity-oriented mutual funds, provided these gains are subject to Securities Transaction Tax (STT). A common question is whether the Section 87A rebate applies to tax calculated under this special provision.

The Issue for AY 2025–26

For AY 2025–26, many taxpayers with total income including STCG under Section 111A found that their rebate claim under Section 87A (₹25,000) was restricted by the Centralised Processing Centre (CPC) and upheld by the Appellate Authority, citing CBDT Circular No. 13/2025. The Circular interpreted the law to bar the Section 87A rebate against tax payable on special rate incomes, referencing an upcoming amendment made by the Finance Act, 2025, but applying the restriction even for AY 2025–26.

ITAT Ahmedabad’s Ruling: What It Decided and Why

The Income Tax Appellate Tribunal (ITAT) Ahmedabad considered a case where an individual taxpayer’s total income (including Section 111A STCG) was just below ₹7 lakh. The CPC had allowed only a partial rebate (₹12,066), not the full permitted ₹25,000. On appeal, the ITAT ruled:

• Statute Prevails Over Circulars: Section 87A or Section 111A did not contain any language prohibiting the rebate against STCG taxed under 111A for AY 2025–26.
• CBDT Circular Cannot Restrict Statutory Benefit: Administrative instructions (like Circular 13/2025) cannot impose limitations that are absent in the law.
• Prospective Application of Amendments: The Finance Act, 2025, which restricts the 87A rebate against special-rate incomes, is effective only from AY 2026–27 (i.e., income earned in FY 2025–26 onwards). For AY 2025–26, the law as it stood permits the full rebate.
• Earlier Case Law Supported This View: The Tribunal cited prior rulings (e.g., Jayshreeben Jayantibhai Palsana v. ITO) upholding that substantive benefits must arise from the statute, not be curtailed through administrative interpretation.

Practical Consequences: Who Benefits, What to Do

Who is affected:

• Any resident individual whose total income (after eligible deductions) for AY 2025–26 is less than ₹7 lakh, including those whose income comprises short-term capital gains taxed at 15% under Section 111A.

What benefits:

• Such taxpayers are entitled to claim the full Section 87A rebate (₹25,000), even against tax calculated on Section 111A STCG, provided all other statutory conditions are met.
• If the rebate has been incorrectly restricted in your intimation or by the CPC, you may be eligible for a refund or reduced tax liability after rectification.

Worked Example

[The actual net tax will also include cess, rounding, etc. above is illustrative. If CPC allowed a lesser rebate, taxpayer can seek correction.]

Key Dates and Timeline

• 15 Sept 2025: Income tax return filed for AY 2025–26
• 19 Sept 2025: CBDT issues Circular No. 13/2025 restricting 87A rebate
• 16 Mar 2026: Addl. CIT(A) upholds restriction
• 1 Sep 2026: ITAT Ahmedabad allows full rebate, directs correction

Looking Ahead: For AY 2026–27 and Beyond

The Finance Act, 2025 amends Section 87A to expressly exclude incomes taxed at special rates (including under Section 111A) from rebate eligibility, effective AY 2026–27 onwards. Thus, for income earned in FY 2025–26 and subsequent years, this benefit will not be available for STCG under Section 111A. For AY 2025–26, however, the full rebate remains claimable.

Practical Steps for Taxpayers

1. Check your ITR intimation: If your Section 87A rebate has been restricted for AY 2025–26 despite total income below ₹7 lakh, review your computation.
2. File for rectification/appeal if needed: Use online rectification under Section 154 or file an appeal if eligible.
3. Keep documentation: Retain your ITR copy, computation sheet, intimation, and the ITAT ruling if referencing the issue with the tax department.

References

• Income Tax Act, Sections 87A, 111A
• Finance Act, 2025
• CBDT Circular No. 13/2025
• ITAT Ahmedabad, Kajol Patel Vs ITO (01/09/2026)

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