A recent ruling by the Income Tax Appellate Tribunal (ITAT) Ahmedabad has once again sparked debate on whether small taxpayers can claim rebate under Section 87A if they have short-term capital gains (STCG) taxed at special rates.

What the Finance Act 2025-26 says

As per the Finance Act for FY 2025-26, if a taxpayer earns special rate income, they cannot claim rebate under Section 87A in the new tax regime for income up to ₹12 lakh. Short-term capital gains on sale of shares or equity mutual funds within 12 months are considered special rate income.

The Ahmedabad Case

In this case, taxpayer Jayashreeben declared a total income of ₹4,27,635 in FY 2023-24. This included:

• ₹3,79,559 as STCG under Section 111A

• ₹38,840 as LTCG under Section 112A

• ₹9,236 from other sources

After revising her return, her taxable income came down to just ₹13,320, below the earlier rebate threshold of ₹7 lakh. She claimed rebate under Section 87A.

While both the Income Tax Department and CIT(A) rejected her claim, the ITAT overruled and allowed it, stating:

• The Finance Bill 2025 introduced restrictions on 87A rebate for special rate income, but these apply only from AY 2026-27.

• For earlier years, including AY 2024-25, there is no such restriction.

Expert Opinion

• S.R. Patnaik (Partner, Cyril Amarchand Mangaldas): The ITAT ruling makes it clear that there is no bar under Sections 87A or 111A for rebate on STCG for earlier years.

• Abhishek Soni (Founder, Taxwin): This ruling is case-specific. Other taxpayers may have to appeal individually to claim similar relief.

• Ankit Jain (Ved Jain & Associates): Since CPC auto-rejects such claims without giving taxpayers a chance to respond, the number of appeals is likely to rise.

👉 In short, the ITAT decision gives relief to small taxpayers for FY 2023-24 (AY 2024-25), but from FY 2025-26 onwards, rebate on STCG under Section 87A will not be available.