The Income Tax Department has provided relief to taxpayers who recently faced additional tax demands about incorrect 87A rebate. The Central Board of Direct Taxes (CBDT) has stated that if such taxpayers pay their outstanding dues by December 31, 2025, they will not be charged interest on late payments. This order was issued under Section 119 of the Income Tax Act.
“It is noticed that in certain cases, the returns had already been processed and rebate was allowed under Section 87A of the Act on incomes chargeable to tax at special rates. In such cases, rectifications have to be carried out to disallow such rebate, which has been incorrectly allowed. Such rectifications will result in demands getting raised. If the payments of such demands raised are delayed then the same are liable for charging of interest under section 220(2) of the Act,” the Central Board of Direct Taxes (CBDT) has said in a circular.
Tax demands have increased due to these errors. Since taxpayers must repay this amount, they will also be liable to pay interest under Section 220(2) if they make a late payment.
What is Section 220(2)?
According to this provision, if a taxpayer fails to pay their tax dues on time, interest is charged on the outstanding amount. This interest continues to accrue until the full payment is made.
Section 87A and special rate income
Section 87A provides tax exemption to small taxpayers if their total income is below a certain limit (currently ₹7 lakh). However, this exemption is only applicable on normal income. If someone’s income is taxable at a special rate, such as capital gains or lottery income, the 87A exemption does not apply to that portion.
Relief for these taxpayers now
The CBDT has stated that in such cases, if taxpayers pay their dues by December 31, 2025, interest will not be charged. But if someone doesn’t pay by this date, interest under Section 220(2) will be charged from the date the normal payment deadline ended.
“In order to mitigate the genuine hardship arising to such taxpayers on account of interest payable under section 220(2) of the Act, the Central Board of Direct Taxes (‘the Board’), in exercise of its powers conferred under section 119 of the Act, directs that the interest payable under section 220(2) of the Act shall be waived in such cases where the payment of the demands raised, is made on or before 31.12.2025,” the circular said.
Why is this move important?
This situation arose unexpectedly for many taxpayers because they had already received a refund or been shown a lower tax. Now, when the error was rectified, they received a demand notice. Therefore, the CBDT, considering the humanitarian aspect, has decided to waive the interest, provided the payment is made on time.