Income Tax Dept denies Section 87A rebate on ₹20 lakh STCG under the new tax regime; taxpayer wins at ITAT. Know the full case

Renu Singla, a resident of Gurugram, had short-term capital gains (STCG) worth over ₹20 lakh in AY 2025-26. Her total income, apart from STCG, was below ₹7 lakh. Yet, after she filed her ITR for AY 2025-26, the Income-tax Department denied her the rebate on tax on STCG and raised a tax demand of ₹25,840. She contested the taxmen's demand and won at ITAT, Delhi on Wednesday, September 9, 2026. This article explains the full case.

The order can be significant relief for salaried individuals and retail investors whose total income in AY 2025-26, including STCG from equity trading, falls below the ₹7 lakh threshold under the new tax regime.

The case

Singla had declared a total income of ₹5,38,610. Her income comprised house property income of ₹3,51,701, income from other sources of ₹18,290, and STCG under Section 111A of ₹20,36,155. However, her total income was assessed at ₹5,73,610 after adjustments during processing,

The dispute started when the Centralised Processing Centre, while processing her return under Section 143(1), restricted the Section 87A rebate from ₹25,000 to ₹3,500 by excluding tax on the STCG component, leading to an additional tax tax demand of ₹25,840, including interest.

The key question before ITAT was whether the rebate under Section 87A is allowable on tax attributable to STCG taxable under section 111A of the Income Tax Act 1961, for AY 2025-26, where the assessee’s total income is below ₹7,00,000 and tax is computed under the new tax regime.

The assessee's representative pointed out that restriction on Section 87A rebate for special-rate income was introduced only by the Finance Act 2025, prospectively with effect from AY 2026-27. He also argued that the first proviso to Section 87A, inserted by the Finance Act 2023, grants rebate to a resident individual in the new tax regime whose total income does not exceed ₹7,00,000, "without carving out any exclusion for income taxable u/s 111A". .

The tribunal agreed to above points raised by the assessee's representative.

The ITAT also relied on a decision of the ITAT Ahmedabad Bench in Jayshreeben Jayantibhai Palsana vs. ITO, in which it was held that "section 87A rebate for special-rate income was introduced only by the Finance Act 2025, prospectively w.e.f. AY 2026-27 and Explanatory Memorandum to Finance Bill cannot override statutory language"

A coordinate bench of the Delhi ITAT in Manan Anand vs. ITO had also decided the issue in favour of the assessee on the same grounds.

In its final decision, the tribunal set aside the Section 143(1) intimation and allowed the full rebate of ₹25,000 under Section 87A. It also deleted the demand of ₹25,840.

For retail investors who sold equity shares or equity mutual funds within one year of purchase and incurred short-term capital gains taxed at 20% under Section 111A, the ruling confirms that for Assessment Year 2025-26, if their total income is below ₹7 lakh and they are in the new tax regime, the CPC cannot restrict the rebate to the slab-rate tax alone.

The restriction announced in Budget 2025 applies only from Assessment Year 2026-27 onwards, following the Finance Act 2025 amendment. Taxpayers who received similar intimations restricting their rebate on STCG may have grounds to seek rectification.