Claimed Section 87A rebate on capital gains in the new tax regime? CBDT offers a small relief

The Central Board of Direct Taxes (CBDT) has provided a small relief to taxpayers by waiving interest on tax demands arising from claims of Section 87A rebate on incomes taxed at special rates, such as long-term capital gains (LTCG) and short-term capital gains (STCG) from equity mutual funds and shares.

If you previously claimed a Section 87A tax rebate on special rate income in your ITR, which was processed, you may have received a tax demand notice. If you pay this tax by December 31, then you won't have to pay any extra interest on such amount.

The issue

Under the new tax regime, the Section 87A rebate of up to ₹25,000 applies when a person's taxable income is not more than ₹7 lakh. There has always been a debate on whether special rate incomes can be considered for the Section 87A rebate if the total income is below ₹7 lakh.

Last year, ITR filing utilities stopped allowing tax rebate under section 87A for special rate incomes after July 5, 2025. Many taxpayers, who had filed returns and claimed the rebate, including special rate incomes last year, have reportedly received tax demand notices recently.

After recent judgments related to Section 87A rebate, it was expected that the Income Tax Department would allow the rebate for those having income from special rate assets but below ₹7 lakh.

What the CBDT says

According to the circular, special-rate incomes are taxed separately and not included in the slab-based calculation under the new tax regime. Further, the Section 87A rebate applies only to normal income, not to special-rate income.

The circular said that income chargeable to tax at special rates is not included while determining the chargeability of tax under the new tax regime under Section 115BAC(1A) of the Income Tax Act.

In many cases, the returns had already been processed and the rebate was allowed under section 87A of the Income Tax Act, 1961, 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 CBDT said.

"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," it added.

What if the taxpayer fails to pay the tax demand

If a taxpayer fails to pay the demand raised as a result of the rectification order passed by the CPC on or before 31.12.2025, the interest shall be charged under section 220(2) of the Act from the day immediately following the end of the period mentioned in subsection (I) of section 220 of the Act, the CBDT said.