The Income Tax Appellate Tribunal (ITAT), Delhi ruled on Wednesday, September 9, 2026, that full rebate under Section 87A of the Income Tax Act, 1961 is available against tax on short-term capital gains (STCG) taxed under Section 111A for Assessment Year 2025-26, even when the assessee opts for the new tax regime under Section 115BAC. According to reports from The Economic Times and Mint, this ruling provides 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 tribunal's decision comes as the new tax regime offers ₹60,000 maximum rebate for resident individuals with total income up to ₹12 lakh, though this rebate cannot be applied to special-rate income like capital gains. The ruling is particularly significant as it provides clarity for taxpayers filing returns for Assessment Year 2025-26 and could offer an important avenue for taxpayers facing similar disputes in the future.
The Nagpur ITAT has upheld a ₹23,494 Section 87A rebate claimed by a taxpayer on short-term capital gains under Section 111A, providing crucial additional support for the Delhi tribunal's ruling. As reported by Mint, Sanjay Kumar Garg, who filed his income-tax return for assessment year 2025-26 under the new tax regime, declared total income of about ₹6.91 lakh from salary, capital gains and other sources and claimed the rebate. The Centralised Processing Centre (CPC) denied the rebate while processing his return, resulting in an additional tax demand of ₹16,160. The Nagpur tribunal rejected the Income Tax Department's challenge, finding no express bar on the rebate for STCG under the law applicable to AY 2025-26. The tribunal noted that Section 87A did not expressly bar the rebate against tax arising from STCG covered under Section 111A, and that Section 111A does not contain a provision restricting the Section 87A rebate.
According to Mint reports, capital gains are generally taxed at special rates and therefore the rebate that makes normal income tax-free up to ₹12 lakh under the new regime does not apply to them. The Section 87A rebate applies only to tax on normal income taxable at slab rates and cannot be claimed against tax on income taxed at special rates, even if total income, including capital gains, does not exceed ₹12.75 lakh. For example, short-term capital gains on listed shares are taxed at a flat rate of 20% under Section 111A beyond the basic exemption limit of ₹4 lakh, while long-term capital gains on specified assets are taxed at 12.5% under Section 112A, with the first ₹1.25 lakh of eligible gains exempt from tax. As noted by Nishant Shanker, tax and FEMA expert at Navraj Global Advisors, "The rebate cannot be used directly against tax on LTCG taxable u/s 112A. Therefore, even if a taxpayer's total income is below ₹12.75 lakh, tax may still arise on taxable equity or equity oriented mutual fund gains."
The assessee's representative argued 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. According to The Economic Times and Mint, he also pointed out 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 lakh, without carving out any exclusion for income taxable under Section 111A. The tribunal agreed with these points and relied on the ITAT Ahmedabad Bench decision in Jayshreeben Jayantibhai Palsana vs. ITO, which held that the restriction applies only from AY 2026-27 onwards. The Nagpur ITAT also referenced earlier decisions including Pranay M Kothari, Manojbhai C. Kamdar, Jayshreeben Jayantibhai Palsana and Basty Keshava Shenoy, which supported the taxpayer's position that the law applicable for AY 2025-26 did not exclude income taxable under Section 111A from the Section 87A rebate. The tribunal noted a key distinction that the law specifically restricts the Section 87A rebate against tax payable on certain long-term capital gains under Section 112A, but there was no corresponding restriction for STCG under Section 111A.
In its final decision, the tribunal set aside the Section 143(1) intimation and allowed the full rebate of ₹25,000 under Section 87A, as reported by The Economic Times and Mint. The ruling confirms that for Assessment Year 2025-26, if retail investors sold equity shares or equity mutual funds within one year of purchase and incurred short-term capital gains taxed at 20% under Section 111A, their total income must be below ₹7 lakh and they are in the new tax regime for the CPC to allow the full rebate. The case demonstrates the important distinction between normal income and special-rate income under the new tax regime, where Section 87A rebate cannot be used to reduce tax on capital gains despite being available for other income sources. The ruling also highlights that the restriction introduced by the Finance Act 2025 applies from AY 2026-27 onwards, providing crucial clarity for taxpayers filing returns for AY 2025-26. Taxpayers who received similar intimations restricting their rebate on STCG may have grounds to seek rectification based on these rulings, with the Delhi and Nagpur ITAT decisions available on the official ITAT website for detailed reference.
