Income Tax: Why You Might Not Get Tax Rebate Under Section 87A Even If Your Income Is Below ₹7 Lakh

The Indian government introduced a tax rebate under Section 87A to help people with lower incomes pay less or no tax. This rebate is available under both the old and new tax regimes, but the rules differ slightly. In the new tax regime, if your annual income is up to ₹7 lakh, you can get a rebate of up to ₹25,000, making your tax liability zero. In the old tax regime, this benefit applies if your income is up to ₹5 lakh, with a rebate of up to ₹12,500. However, some taxpayers are facing issues where they are not getting this rebate even when their income is below these limits. Let’s understand why this is happening in simple terms.

What’s the Problem?

The issue is related to a specific type of income called “special rate income,” such as short-term capital gains (e.g., profits from selling shares or mutual funds held for less than a year). According to a recent change in the income tax filing system, if your income includes such special rate income, you may not get the Section 87A rebate, even if your total income is within the ₹7 lakh limit in the new tax regime.

This problem started after the income tax filing portal was updated on July 5, 2024. Before this update, taxpayers with short-term capital gains could still claim the rebate if their total income was below ₹7 lakh. But now, the system is not allowing the rebate for such cases, which is causing confusion and extra tax burdens for many.

What Changed in Budget 2025?

In Budget 2025, the government made changes to the rules for the Section 87A rebate, which will apply from the financial year 2025-26 (starting April 1, 2025). The new rules state that if your income includes special rate income, like short-term capital gains, you won’t get the rebate, even if your total income is below the set limit. Additionally, the income limit for the rebate in the new tax regime has been increased to ₹12 lakh, with a maximum rebate of ₹60,000.

However, the issue is that this new rule is being applied to the financial year 2024-25 as well, even though it shouldn’t be. According to tax experts, for the financial year 2024-25, taxpayers with income up to ₹7 lakh (including special rate income) should still be eligible for the ₹25,000 rebate under the new tax regime. But the updated tax filing system is not allowing this, which is a mistake.

Why Is This Happening?

Chartered accountants have pointed out that the tax filing system’s update is not in line with the current Income Tax Act for 2024-25. The Act does not say that special rate income should disqualify someone from getting the Section 87A rebate for this year. The restriction on special rate income applies only to long-term capital gains (taxed at 10% under Section 112A), not short-term capital gains. Yet, the system is wrongly denying the rebate for short-term capital gains as well.

For example, if you earned ₹5 lakh from your salary and ₹2 lakh from short-term capital gains, your total income is ₹7 lakh. In the new tax regime, you should get a ₹25,000 rebate, making your tax zero. But after the July 5, 2024, update, the system is not giving this rebate, and you may end up paying tax on the ₹2 lakh capital gains.

What Does This Mean for Taxpayers?

This issue is causing problems for many taxpayers, especially those with small incomes from investments like shares or mutual funds. If your income includes short-term capital gains, you might have to pay tax even if your total income is below ₹7 lakh in the new tax regime for 2024-25. This is unfair because the law for this year allows the rebate.

Tax experts like Mayank Mohanka have highlighted that this error in the tax filing system could lead to notices from the Income Tax Department later, as some taxpayers might mistakenly get rebates they’re not entitled to, while others lose out on rebates they deserve.

What’s Next?

The government has increased the rebate limit to ₹60,000 and the income threshold to ₹12 lakh for the financial year 2025-26, which is good news for taxpayers. However, for the current year (2024-25), the system needs to be fixed to allow the Section 87A rebate for incomes up to ₹7 lakh, even if they include short-term capital gains.

If you’re facing this issue, it’s a good idea to consult a tax professional or chartered accountant to ensure your tax return is filed correctly. They can help you claim the rebate you’re entitled to or guide you on what to do if the system is not cooperating.