Confusion over Section 87A of income tax rebate has once again come to the surface. After the order of the Bombay High Court, many taxpayers who filed revised ITR in January 2025 are now getting demand notices from the Income Tax Department. Most of them are those whose total income is less than Rs 7 lakh.

What is the controversy?

According to tax experts, these notices sent by the department have been issued under Section 143 (1) of the Income Tax Act. It is being said in these that people whose income falls under special tax rates—such as Short-Term Capital Gains (STCG) taxed at 15% under Section 111A—cannot be given exemption under 87A even if they have filed their returns within the revised time limit.

When did this confusion start

In the financial year 2023-24 (assessment year 2024-25), the rebate under section 87A was to be given to those with total income up to Rs 5 lakh in the old tax system and up to Rs 7 lakh in the new tax system. But the question arose whether this exemption will also be available on income taxed at special rates like STCG?

After the ITR utility was updated on 5 July 2024, the benefit of 87A on STCG income was discontinued in the new tax system. The matter went to the court and the Bombay High Court ordered the department to give a chance for amendment in December 2024. Under this, taxpayers were allowed to revise ITR from January 1 to January 15, 2025.

But now the same taxpayers, who had revised ITR relying on the court order, are getting notices from the department that their 87A rebate benefit is being rejected.

Also read: ITR Filing AY 2025-26: THESE senior citizens don’t need to file income tax returns

CAs also entered the fray, preparations for appeal began

Many chartered accountants are filing appeals for their clients before the CIT(A)—the Income Tax Appellate Officer. In some cases in areas like Gujarat and Mumbai, decisions have also come in favor of taxpayers, which has raised hopes of some relief. However, experts say that every case is different and the decision will be case-to-case.

Those who filed earlier are also stuck

Even those taxpayers who filed ITR before July 5, 2024 and had already got the benefit of 87A—they are also now being sent demand notices. According to experts, the department is now revising the old returns at its level and demanding afresh — sometimes even for small amounts.

New announcement in Budget 2025, more confusion

In Budget 2025, the government has made it clear that from FY 2025-26, income with special tax rates like STCG will not get the exemption of 87A. But this rule does not apply to the previous financial year i.e. FY 2023-24. Due to this, more confusion has spread among the taxpayers.

Also read: ITR Filing 2025: 5 must-verify points before your offline ITR submission

Summing up

Taxpayers and tax professionals are now serious about this matter. On one hand there is a court order, on the other hand there is a different interpretation of the department. Until any clear guidelines come, this dispute will continue and taxpayers will have to resort to appeal to get relief.