ITR filing alert: Rebate on market gains allowed, but not auto-applied

Time of India

6 days ago

Ahmedabad: Filed your ITR and surprised by a tax bill despite being under the Rs 7 lakh limit under the new tax regime? You're not alone. The income tax portal isn't auto-applying the 87A rebate on stock market gains—but the good news is, you can still claim it manually, say tax experts.
To illustrate, if a resident individual has a regular income of Rs 5 lakh and short-term capital gains of Rs 75,000, the tax liability would be Rs 10,000 on the regular income and Rs 15,000 on the STCG (taxed at 20%). The utility currently applies the rebate only to the Rs 10,000 from regular income. However, if the taxpayer manually enters a rebate of Rs 25,000, the system accepts it — effectively reducing the net tax liability to zero.
"It is good to note that the Income Tax Department appears to have accepted, in principle, that an eligible taxpayer should be entitled to Section 87A rebate even on capital gains," said Mukesh Patel, international tax expert. "However, this relief should have been auto applied by the ITR utility rather than requiring taxpayers to manually make the claim."
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The debate over the applicability of the Section 87A rebate on capital gains first surfaced during ITR filings for AY 2024–25.
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The confusion centred on whether the rebate was available on STCG from equities under Section 111A and long-term capital gains (LTCG) under Section 112.
On July 5, 2024, the Central Board of Direct Taxes (CBDT) instructed the Centralised Processing Centre (CPC) to block such rebate claims in the utility.
Taxpayers, however, argued that there had been no change to the language of Section 87A that could justify denial of the rebate. Their argument gained further strength when the Finance Act, 2025, formally amended Section 87A—but only with prospective effect, starting AY 2026–27.
This, experts say, effectively vindicates the position that the rebate on capital gains is still valid for AY 2025–26—provided taxpayers proactively claim it while filing their returns.