Disallowance of Rebate under section 87A for Small Taxpayers: A Call for Clarity

The IT Act provides a clear carve-out under Section 112A, which denies small taxpayers the rebate on Long Term Capital Gains (LTCG) from the sale of listed shares or securities. However, this restriction does not extend to Short Term Capital Gains (STCG), taxed at a special rate of 15% in FY 2023-24.

As per earlier provisions, small taxpayers could claim a rebate under Section 87A on STCG tax liabilities if their Total Income was below the specified threshold, including under the old tax regime (less than INR 5 lakhs).

On July 5, 2024, however, the Income Tax Department updated its utility, preventing small taxpayers from claiming this rebate on STCG tax. This unexpected restriction created confusion and went against prior practices.

The matter reached the Hon’ble Bombay High Court, and following its directions, the CBDT extended the deadline for revising returns for FY 2023-24 to January 15, 2025. The ITR utility was also updated to allow manual entry of the Section 87A rebate.

This situation now raises a critical question: will the Central Processing Centre (CPC) honor the rebate in line with earlier legislative intent when processing revised returns? The lack of clarity has caused unnecessary stress for small taxpayers, many of whom face minimal liabilities and have limited access to professional resources.

Issuing a clear clarification would go a long way in avoiding prolonged litigation and empowering small taxpayers to make informed decisions. Hopefully, the Bombay HC would also render its crucial decisions on the issue which may be the guiding factor for the CBDT.