Introduction: Section 87A Tax Rebate and CBDT’s Latest Circular

The Central Board of Direct Taxes (CBDT) has addressed a long-standing issue faced by taxpayers who claimed the Section 87A tax rebate on incomes taxable at special rates, such as short-term capital gains (STCG) on equities. Through Circular No. 13/2025, the CBDT clarified its stance and offered partial relief by waiving penal interest if tax demands are cleared before December 31, 2025.

This move directly impacts taxpayers who previously received rebate benefits on such income but are now facing income tax demand notices due to rectifications in their ITR processing.

What the CBDT Circular 13/2025 States

The circular, issued on September 19, 2025, provides detailed clarifications regarding Section 87A claims on special rate income.

Key Takeaways from the CBDT Circular

• Section 115BAC(1A) does not allow a rebate under Section 87A on incomes taxed at special rates under Chapter XII, including STCG taxed at 15% under Section 111A.
• In several processed ITRs, the rebate was incorrectly allowed, which led to rectification orders and demand notices.
• If taxpayers pay the demand raised on or before December 31, 2025, the interest under Section 220(2) will be completely waived.
• However, if payment is not made by the deadline, interest at 1% per month will apply from the date specified in Section 220(1).

This effectively means taxpayers will not escape the tax demand itself, but they will be spared additional interest liability if they settle dues within the timeline.

Why the Section 87A Rebate on STCG Became a Problem

The controversy began when the Income Tax Return (ITR) utility software stopped permitting Section 87A rebates against short-term capital gains on equity and equity-oriented mutual funds after July 5, 2024.

Previously, taxpayers could file returns claiming this rebate, but after the software change, such filings were disallowed. Those who filed ITRs under the old system are now receiving tax demand notices.

According to the Chartered Accountants Association, Surat, more than 500 demand notices were issued recently to taxpayers who claimed the rebate. In several cases, refunds were adjusted by deducting the wrongly claimed rebate amount.

Expert Insights on Section 87A Rebate Litigation

Tax experts believe that this circular offers limited relief but does not resolve the underlying litigation concerns.

• Mihir Tanna, Associate Director at S.K. Patodia & Associates LLP, highlighted that while the waiver of penal interest is welcome, the legal dispute around Section 87A claims remains unresolved.
• Courts have issued conflicting judgments: while the Bombay High Court restricted the 87A claim, several lower courts allowed it, creating confusion among taxpayers.
• The circular suggests that taxpayers must comply with the tax demand but can avoid further financial burden by paying it before the deadline.

This makes it clear that litigation on Section 87A rebate claims is likely to continue despite the temporary relief.

Impact on Taxpayers Who Claimed Section 87A on STCG

If you filed your ITR before July 5, 2024, and claimed the Section 87A rebate on STCG, here’s what you can expect:

1. Demand Notices: You may receive a notice disallowing the rebate and raising a tax demand.
2. Refund Adjustments: If you were due a refund, the rebate amount might be deducted.
3. Deadline for Relief: Pay the demand by December 31, 2025, to avoid penal interest.
4. Continued Litigation: While you cannot contest the immediate demand through this circular, legal battles over 87A’s applicability are still ongoing.

How Taxpayers Should Respond

To safeguard against penalties, taxpayers should take the following steps:

• Check Notices Carefully: Review demand notices to understand the reason and amount raised.
• Consult Tax Professionals: Seek advice from a chartered accountant to evaluate whether you should comply or consider legal options.
• Make Timely Payments: If the tax demand is valid, pay it before December 31, 2025, to avoid interest charges.
• Stay Updated on Judgments: Keep track of court rulings, as litigation could change the applicability of the Section 87A rebate in the future.

Conclusion: Section 87A Relief Offers Time, Not Resolution

The CBDT’s Circular 13/2025 gives taxpayers breathing space by waiving penal interest on wrongly claimed Section 87A rebates for STCG income. However, it does not eliminate the tax demand itself, nor does it settle the ongoing legal uncertainty.

For taxpayers, the message is clear—pay by December 31, 2025, to minimise financial burden, while keeping an eye on future litigation that may redefine Section 87A rebate eligibility.