Section 87A rebate is available against tax on short-term capital gains under section 111A.

By | July 16, 2026
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Section 87A rebate is available against tax on short-term capital gains under section 111A.

Issue

Whether a resident individual governed by the default tax regime under section 115BAC(1A) is entitled to a tax rebate under section 87A against the tax payable on short-term capital gains chargeable under section 111A, provided their total income does not exceed the statutory threshold for the Assessment Year 2024-25.

Facts

  • The assessee, a resident individual governed by the new tax regime under section 115BAC(1A), filed a return of income for the Assessment Year 2024-25.

  • The total income declared by the assessee was approximately Rs. 5.28 lakhs, which was well within the expanded threshold limit prescribed for a rebate under section 87A.

  • The declared total income included short-term capital gains (STCG) of approximately Rs. 1.42 lakhs earned from the transfer of listed equity shares, which is chargeable at a special rate under section 111A.

  • While processing the return under section 143(1), the Central Processing Centre (CPC) denied the section 87A rebate specifically against the tax computed on the short-term capital gains.

  • The CIT(A) upheld the CPC’s disallowance, ruling that a section 87A rebate cannot be claimed against tax payable on special-rate incomes categorized under Chapter XII, which includes section 111A.

Decision

  • Held, yes: The issue was decided entirely in favor of the assessee, and the tax authorities were directed to grant the section 87A rebate on the short-term capital gains.

  • No Statutory Prohibition: The court observed that for the relevant assessment year, there was no express statutory restriction or proviso in the Income-tax Act prohibiting the application of a section 87A rebate against section 111A tax liabilities.

  • Distinct from Section 112A: Unlike section 112A (long-term capital gains on shares), which contains an explicit statutory bar preventing section 87A relief, section 111A does not contain any such restrictive clause.

  • Regime Entitlement: An individual opting for or governed by section 115BAC(1A) cannot be denied the benefit of the rebate up to the specified income limit merely because a component of their income is taxed at a special rate.

Key Takeaways

  • STCG Qualifies for Rebate: Tax payable on short-term capital gains from equity shares ($\text{Section 111A}$) is fully eligible for the Section 87A rebate, provided the total net taxable income remains below the regime threshold.

  • Literal Interpretation of Exclusions: The tax department cannot create generic exclusions for special-rate incomes under Chapter XII by administrative instruction; exclusions must be explicitly written into the text of the statute (as is done for section 112A).

  • CPC Processing Corrections: Automated tax adjustments made during processing under section 143(1) by the CPC that disallow the 87A rebate on section 111A incomes are legally unsustainable and open to appellate correction.

IN THE ITAT MUMBAI BENCH ‘J (SMC)’
Lisha Gajendra Marlecha
v.
Income-tax Department, CPC, Bengaluru
ANIKESH BANERJEE, Judicial Member
and Om Prakash Kant, Accountant Member
IT Appeal No. 812 (MUM) OF 2026
[Assessment year 2024-25]
JUNE  18, 2026
Mohd. Iqbal for the Appellant. Mukesh Thakwani, SR DR for the Respondent.
ORDER
Om Prakash Kant, Accountant Member. – This appeal by the assessee is directed against the order dated 27.11.2025 passed by the learned Additional/Joint Commissioner of Income-tax (Appeals), Raipur [“Ld. CIT(A)”] for Assessment Year 2024–25, whereby the action of the Central Processing Centre, Bengaluru (“CPC”) in denying rebate under Section 87A of the Income-tax Act, 1961 (“the Act”) against tax payable on short-term capital gains chargeable under Section 111A of the Act has been affirmed. The grounds raised by the assessee are reproduced as under:
“1. The CIT(A) Raipur has erred in sustaining the disallowance made by CPC Bangalore of rebate u/s 87A against short term capital gains u/s 111A. The disallowance of rebate u/s 87A against short term capital gains u/s 111A is bad in law and against the principles of natural justice.
2. The appellant pray for suitable costs.
3. The appellant crave liberty to add, amend, alter or modify any of the ground of appeal on or before its hearing before your honour.”
2. The material facts are not in dispute. The assessee, an individual resident in India, filed the return of income declaring total income of Rs. 5,28,210/-, which included short-term capital gains of ₹1,42,120/- arising from transfer of equity shares. While processing the return under Section 143(1) of the Act, the CPC denied the rebate under Section 87A in respect of the tax payable on such short-term capital gains taxable under Section 111A. Aggrieved by the adjustment made in the intimation, the assessee preferred an appeal before the Ld. CIT(A).
2.1 Before the first appellate authority, it was contended that the assessee was governed by the provisions of Section 115BAC(1A) of the Act and the total income being below the prescribed threshold of Rs 7,00,000/-, the assessee was entitled to rebate under Section 87A. It was further argued that while the Legislature has expressly restricted the availability of rebate in respect of long-term capital gains chargeable under Section 112A, no such exclusion exists in Section 111A. The Ld. CIT(A), however, rejected the contention and held that rebate under Section 87A is not available against tax payable on income chargeable at special rates under Chapter XII of the Act, including short-term capital gains taxable under Section 111A. Accordingly, the appeal of the assessee was dismissed. The relevant finding of Ld. CIT(A), is reproduced as under:
“7. FINAL DECISION AND FINDINGS: I have carefully considered the submissions made by the appellant and have also perused the assessment records and the departmental database. The issue for determination in the present appeal is whether the appellant is entitled to the rebate under section 87A of the Income-tax Act, 1961 in respect of income arising from short-term capital gains chargeable under section 111A and long-term capital gains chargeable under section 112A of the Act.
8. For proper appreciation, the relevant portion of section 87A, as applicable for the year under consideration, is reproduced below:
“Rebate of income-tax in case of certain individuals.
87A. An assessee, being an individual resident in India, whose total income does not exceed five hundred thousand rupees, shall be entitled to a deduction, from the amount of income-tax (as computed before allowing the deductions under this Chapter) on his total income with which he is chargeable for any assessment year, of an amount equal to one hundred per cent of such income-tax or an amount of twelve thousand and five hundred rupees, whichever is less:
Provided that where the total income of the assessee is chargeable to tax under sub-section (1A) of section 115BAC, and the total income-
(a) does not exceed seven hundred thousand rupees, the assessee shall be entitled to a deduction from the amount of income-tax (as computed before allowing the deductions under this Chapter) on his total income with which he is chargeable for any assessment year, of an amount equal to one hundred per cent of such income-tax or an amount of twenty-five thousand rupees, whichever is less;
(b) exceeds seven hundred thousand rupees and the income-tax payable on such total income exceeds the amount by which the total income is in excess of seven hundred thousand rupees, the assessee shall be entitled to a deduction from the amount of income-tax (as computed before allowing the deductions under this Chapter) on his total income, of an amount equal to the amount by which the income-tax payable on such total income is in excess of the amount by which the total income exceeds seven hundred thousand rupees.”
Following second proviso shall be inserted after the proviso to section 87A by the Finance Act, 2025, w.e.f. 1-4-2026:
“Provided further that the deduction under the first proviso, shall not exceed the amount of income-tax payable as per the rates provided in sub-section (1A) of section 115BAC.”
9. This section falls under Chapter VIII of the Act, titled “Rebates and Reliefs,” covering sections 87 to 89A. The rebate contemplated therein is to be allowed from the amount of income-tax computed before allowing any deductions under this Chapter, meaning thereby that it operates only upon tax computed on “total income” as defined under the Act.
10. It is evident from the overall scheme of the Act that the rebate under section 87A applies only to the tax computed at the normal slab rates, and not to tax computed at special rates under Chapter XII, which deals with the Determination of Tax in Certain Special Cases. Both sections 111A and 112A fall within that Chapter and provide for concessional rates of tax on specified categories of capital gains.
11. The relevant portion of section 112A(6) is reproduced below for clarity:
“Where the total income of an assessee includes any long-term capital gains referred to in sub-section (1), the rebate under section 87A shall be allowed from the income-tax on the total income as reduced by tax payable on such capital gains.”
12. The language of the statute is clear and leaves no room for ambiguity. It expressly provides that the rebate under section 87A shall be allowed only after reducing the tax payable on such long-term capital gains. It therefore follows that rebate under section 87A is not available against the tax computed on income chargeable under section 112A.
13. Similarly, section 111A, which governs short-term capital gains on listed equity shares, reads in the relevant part as under:
“111A(1) Where the total income of an assessee includes any income chargeable under the head ‘Capital gains’, arising from the transfer of a short-term capital asset, being an equity share in a company or a unit of an equity oriented fund or a unit of a business trust, and-
(a) the transaction of sale of such equity share or unit is entered into on or after the date on which Chapter VII of the Finance (No. 2) Act, 2004 comes into force; and
(b) such transaction is chargeable to securities transaction tax under that Chapter, the tax payable by the assessee on the total income shall be the aggregate of-
(i) the amount of income-tax calculated on such short-term capital gains-
(a) at the rate of fifteen per cent for any transfer which takes place before the 23rd day of July, 2024; and
(b) at the rate of twenty per cent for any transfer which takes place on or after the 23rd day of July, 2024; and
(ii) the amount of income-tax payable on the balance amount of the total income as if such balance amount were the total income of the assessee.”
14. Further, sub-section (2) thereof provides that –
“Where the gross total income of an assessee includes any short-term capital gains referred to in sub-section (1), the deduction under Chapter VI-A shall be allowed from the gross total income as reduced by such capital gains.”
15. The above provisions make it abundantly clear that short-term capital gains under section 111A are chargeable to tax at a special rate distinct from the normal slab rates applicable to other income, and that no deduction or rebate, including that under section 87A, is permissible against such short-term capital gains.
16. The Finance Bill, 2025, has further clarified the position by proposing to insert a second proviso to section 87A with effect from 1 April 2026, which reads as under:
“Provided further that the deduction under the first proviso shall not exceed the amount of income-tax payable as per the rates provided in sub-section (1A) of section 115ВАС.”
17. The Memorandum explaining the provisions of the Finance Bill, 2025, states that this amendment is intended to clarify that, under the new tax regime, the rebate under section 87A will apply only to tax computed under section 115BAC(1A) and not to tax computed on income taxable at special rates under sections 111A and 112A.
18. In paragraph 156 of the Hon’ble Finance Minister’s Budget Speech for 2025- 26, it was explicitly stated:
“I am now happy to announce that there will be no income tax payable up to income of Rs. 12 lakh (i.e., average income of Rs. 1 lakh per month other than special rate income such as capital gains) under the new regime.”
19. This categorical statement reinforces the legislative intent that income taxable at special rates, such as capital gains, stands outside the purview of the rebate contemplated under section 87A. Although the above amendment will come into force from 01.04.2026, it is clarificatory in nature and merely affirms the legislative intent that the rebate under section 87A was never intended to apply to tax payable on income taxable at special rates.
20. When the statutory provisions are read harmoniously, it becomes clear that the computation of rebate under section 87A must necessarily exclude the tax payable on capital gains taxable under sections 111A and 112A. Both these sections form part of Chapter XII which deals with special rate incomes, separate from the ordinary computation of tax under the normal provisions. The rebate under section 87A is thus confined to the income-tax computed at the normal slab rates applicable to non-special income.
21. In view of the foregoing discussion, it is held that the rebate under section 87A is not allowable against the tax payable on short-term capital gains chargeable under section 111A or long-term capital gains chargeable under section 112A of the Income-tax Act, 1961. The Assessing Officer/ CPC has correctly computed the tax liability in accordance with law, and no interference is called for. Accordingly, all the grounds of appeal stand dismissed.
22. Accordingly, the appeal is dismissed.”
3. Before us, the learned counsel for the assessee filed a paper book containing pages 1 to 45 comprising of submission filed before lower authorities and the judicial decisions relied upon.
4. The learned counsel appearing on behalf of the assessee submitted that the issue is no longer res integra and stands squarely covered in favour of the assessee by the decision of the Co- ordinate Bench of the Tribunal in Jayshreeben Jayantibhai Palsana v. ITO  (Ahmedabad – Trib.)/ITA No. 1014/Ahd/2025 for Assessment Year 2024-25. It was contended that neither Section 87A nor Section 111A contains any statutory prohibition disentitling an assessee from claiming rebate against tax payable on short-term capital gains. The subsequent amendment introduced by the Finance Act, 2025, effective from 01.04.2026, itself demonstrates that prior to such amendment no such restriction existed in law.
4.1 The learned Departmental Representative relied upon the reasoning adopted by the Ld. CIT(A) and supported the impugned order.
5. We have carefully considered the rival submissions, perused the material available on record and examined the statutory provisions governing the controversy. The solitary issue arising for our consideration is whether, for Assessment Year 2024–25, a resident individual whose total income does not exceed the prescribed threshold under Section 87A and who is governed by Section 115BAC(1A), is entitled to rebate under Section 87A against tax payable on short-term capital gains chargeable under Section 111A of the Act.
5.1 At the outset, it is pertinent to note that Section 87A grants a rebate from the amount of income-tax payable by a resident individual subject to fulfilment of the prescribed conditions. The provision, as applicable for the year under consideration, does not contain any express exclusion in respect of tax payable on short- term capital gains under Section 111A. Significantly, the Legislature, while dealing with long-term capital gains taxable under Section 112A, has specifically enacted sub-section (6) of Section 112A, which expressly restricts the grant of rebate under Section 87A against tax payable on such long-term capital gains. The presence of an express exclusion in Section 112A and the conspicuous absence of any corresponding restriction in Section 111A assumes considerable legal significance. It is a settled principle of statutory interpretation that where the Legislature consciously incorporates a restriction in one provision but omits to do so in another analogous provision, such omission cannot be supplied by the ld AO/CIT(A).The reasoning adopted by the Ld. CIT(A) proceeds on the premise that income chargeable at special rates under Chapter XII automatically falls outside the scope of rebate under Section 87A. However, we find no statutory foundation for such proposition. Neither Section 87A nor Section 111A provides that the rebate shall be confined only to tax computed at slab rates or that tax payable under Section 111A shall stand excluded from its ambit.
5.2 The Co-ordinate Bench of the Tribunal in Jayshreeben Jayantibhai Palsana (supra), after an elaborate examination of the statutory framework, has categorically held that for Assessment Year 2024–25 there exists no legislative embargo against granting rebate under Section 87A in respect of tax payable on short-term capital gains chargeable under Section 111A. The Tribunal further observed that the amendment introduced by the Finance Act, 2025, with effect from 01.04.2026 restricting the rebate only to tax computed under Section 115BAC(1A), is prospective in nature and cannot be pressed into service for denying a benefit which was otherwise available under the unamended provisions. The relevant finding of the Co-Ordinate Bench is reproduced as under:
“5. We have carefully considered the rival submissions, the impugned order of the CIT(A), the material placed on record, and the applicable statutory provisions. Thus, the core issue for adjudication before us is –

“Whether a resident individual who has exercised the option under section 115BAC(1A) and whose total income is below Rs.7,00,000/-, is eligible to claim rebate under section 87A against tax payable on STCG under section 111A, in the absence of any express restriction in section 87A or section 111A.”

5.6 The undisputed facts of the case are that the assessee, a resident individual, filed a revised return of income for A.Y. 2024-25 declaring total income of Rs.6,76,402/-, comprising short-term capital gain on listed equity shares taxable at 15% under section 111A, and opted for taxation under the new regime under section 115BAC (1A). The CPC, Bengaluru, processed the return under section 143(1) and denied rebate under section 87A of Rs.13,320/-, resulting in a demand of Rs.15,820/-. The CIT(A) upheld the denial, primarily relying on –

(i) the “subject to” clause in section 115BAC(1A),

(ii) provisions of Chapter XII, and

(iii) the Explanatory notes to the Finance Bill 2025.

5.7 Having perused the relevant statutory provisions and the arguments advanced by the assessee’s Authorised Representative (AR), we find merit in the claim of the assessee.
5.8 The amended first proviso to section 87A [inserted by the Finance Act, 2023 w.e.f. A.Y. 2024-25] provides:

“Where the total income of the assessee is chargeable to tax under sub- section (1A) of section 115BAC and the total income –

(a) does not exceed seven hundred thousand rupees, the assessee shall be entitled to a deduction.”

5.9 This provision applies to any resident individual whose total income does not exceed Rs.7,00,000 and who is assessed under section 115BAC(1A). The statute does not draw any distinction between normal income and income chargeable at special rates, nor does it contain any express exclusion for tax arising under section 111A.
5.10 By contrast, the legislature has inserted an express bar on availability of section 87A rebate in section 112A(6), which states:

(6) Where the total income of an assessee includes any long-term capital gains referred to in sub-section (1), the rebate under section 87A shall be allowed from the income-tax on the total income as reduced by tax payable on such capital gains.

5.11 The absence of a corresponding clause in section 111A is legally significant and supports the principle that when the legislature intended to deny rebate in respect of special income (as in section 112A), it has done so expressly. In contrast, the absence of any exclusion in section 111A or in section 87A must be construed in favour of the assessee.
5.12 At this point we discuss the interplay of Section 115BAC(1A) with Chapter XII where the scope is Confined to Computation of Tax Rates. Section 115BAC(1A) opens with the phrase:

“Notwithstanding anything contained in this Act but subject to the provisions of this Chapter.”

5.13 The purpose of this clause is to enable the computation of income-tax under the concessional rate regime, subject to existing special rate provisions under Chapter XII, such as sections 111A, 112, 112A, etc. This clause governs the computation of tax and does not ipso facto affect eligibility to rebates or deductions unless specifically restricted. Section 87A is not part of Chapter XII; it is an independent rebate provision under Chapter VIII of the Act. Therefore, the overriding clause in section 115BAC(1A) does not derogate or modify section 87A, unless section 87A itself provides for exclusion, which, in the present case, it does not. Thus, section 87A operates on the total tax computed, whether it includes tax at slab rates or special rates, and applies so long as the total income threshold is met.
5.14 The CIT(A) placed strong reliance on the Explanatory Memorandum to the Finance Bill 2025, which clarified that rebate under section 87A is not available on tax arising from special rate incomes, including those under section 111A. However, we find this reliance to be misplaced for two reasons:

– Firstly, the Finance Bill, 2025 itself proposes to insert new restrictions on rebate under section 87A w.e.f. A.Y. 2026-27, which implies that the existing law (i.e., as applicable to A.Y. 2024-25) does not contain such a restriction.

– Secondly, the Explanatory Memorandum cannot override the plain language of the statute. It is a tool of interpretation, not a source of substantive law.

Therefore, the prospective amendment in the Finance Act 2025 supports the view that under the unamended provision applicable for A.Υ. 2024-25, rebate under section 87A cannot be denied merely because tax arises under section 111A.
5.15 In the recent judgment dated 24.01.2025 in the case of The Chamber of Tax Consultants v. Director General of Income Tax (Systems) [TS- 5026-HC- 2025(Bombay)-O], the Hon’ble Bombay High Court considered the issue of system-based denial of 87A rebate on STCG under section 111A for assessees who had opted for 115BAC(1A). While the Hon’ble Court refrained from interpreting the substantive provisions, it held that the assessee must be allowed to claim rebate under section 87A, and it is for the quasi-judicial authority to decide on merits.
Thus, the Hon’ble High Court clearly held that the CPC utility or system configuration cannot override statutory rights, and that each case must be adjudicated on its own merits. We at the Tribunal, being such a quasi-judicial authority, are therefore duty-bound to examine the claim in light of the statutory framework and not be influenced by automated denial or procedural logic adopted by the CPC.
5.16 The assessee has also relied on an appellate order dated 27.05.2025 passed by CIT(A)-1, Nagpur in the case of Avni Milanbhai Maniya, wherein on identical facts the CIT(A) allowed the claim of rebate under section 87A in respect of STCG taxable under section 111A. We also note that such decision was taken by the JCIT/Addl.CIT(A) relying on the decision of Beena Manishbhai Fofaria for the A.Y. 2024-25. While not binding, the said appellate order affirms that divergent views exist and such benefit has been allowed in similar factual circumstances.
5.17 In view of the above discussion, we find that the assessee is a resident individual and the total income declared for the assessment year 2024-25 does not exceed Rs.7,00,000. It is also an admitted position that the assessee has exercised the option to be assessed under the new tax regime in accordance with the provisions of section 115BAC(1A) of the Act. On a plain reading of the statutory provisions, there exists no express bar either in section 87A or section 111A for denial of rebate in respect of tax payable on short-term capital gains arising from transfer of listed equity shares taxable at special rates under section 111A. The legislative intent is further clarified by the subsequent amendment proposed in the Finance Bill, 2025, which is prospective in nature and thereby reinforces that no such restriction was in force during the relevant assessment year. The denial of rebate under section 87A by the CPC, Bengaluru, appears to be based solely on system-driven logic and not on any statutory mandate. Moreover, the interpretation adopted by the CIT(A) in upholding such denial is, in our considered view, not in consonance with the plain and unambiguous language of the law as applicable for A.Y. 2024-25.
5.18 Accordingly, we hold that the assessee is eligible for rebate under section 87A for A.Y. 2024-25 even though the income includes STCG taxable under section 111A. The AO is directed to allow rebate of Rs.13,320/- and recompute tax liability accordingly. The demand of Rs.15,820/- raised in CPC intimation stands deleted. Refund, if any, shall be granted in accordance with law.”
5.3 We are in respectful agreement with the aforesaid reasoning. The amendment brought into force from Assessment Year 2026–27 cannot be treated as retrospective merely because the Memorandum explaining the provisions describes it as clarificatory. When the statutory language applicable to the assessment year under consideration is plain and unambiguous, subsequent legislative changes cannot be employed to curtail an existing benefit unless the statute expressly so provides. In the present case, it is an admitted position that: (i) the assessee is a resident individual; (ii) the assessee is governed by the provisions of Section 115BAC(1A); (iii) the total income of the assessee does not exceed the threshold prescribed under Section 87A; and (iv) the income includes short-term capital gains chargeable under Section 111A. In the absence of any express statutory prohibition operative during the relevant assessment year, denial of rebate under Section 87A merely because a portion of the income is taxable under Section 111A cannot be sustained.
5.4 Accordingly, respectfully following the decision of the Co-ordinate Bench in Jayshreeben Jayantibhai Palsana (supra) and applying the same ratio to the facts of the present case, we hold that the assessee is entitled to rebate under Section 87A in respect of the tax liability computed for Assessment Year 2024–25 notwithstanding that part of the income comprises short-term capital gains chargeable under Section 111A of the Act.
5.5 In view of the foregoing discussion, the impugned order of the Ld. CIT(A) is set aside. The Assessing Officer/CPC is directed to grant the rebate admissible under Section 87A of the Act and recompute the tax liability in accordance with law.
6. In the result, the appeal of the assessee is allowed.