The Central Board of Direct Taxes (CBDT) has reiterated that taxpayers who have income subject to special rates of taxation, like short-term capital gains (STCG), are not eligible to get a tax refund under Section 87A of the Income Tax Act.
Many taxpayers requested a refund on short-term capital gains for the fiscal year 2023–2024; however, the Income Tax department rejected their claims and demanded payment of the outstanding taxes.
These taxpayers have now been requested by the department to pay their bills by December 31, 2025. This holds true even in situations when the refund was previously issued in error.
In its September 19 circular, the CBDT stated that a refund was permitted on incomes subject to special tax rates in a few of instances when returns were handled improperly.
Now, these errors are being fixed, and new demands are being made. Additionally, the circular cautioned that Section 220(2) of the I-T Act may impose interest on any payment delays.
However, the tax department has provided aid to lessen taxpayer suffering. If the outstanding taxes are paid by December 31, 2025, the interest will be waived.
Refund requests under Section 87A for taxpayers with incomes under Rs 7 lakh that include short-term capital gains have been denied by the Income Tax Department since July 2024.
These gains were subject to 15% taxation for FY 2023–2024; however, the rate was raised to 20% for FY 2024–2025.
Under the previous administration, the refund cap for FY 2023–2024 was Rs 5 lakh; under the new one, it was Rs 7 lakh.
Although this clause assisted in lowering the tax obligation to zero, income subject to special rates, such as STCG, was not intended to be covered by the refund.
The matter was brought before the Bombay High Court, which requested in December 2024 that the IT Department permit taxpayers to make changes on their returns.
Many taxpayers continued to receive notifications to pay their outstanding dues after a 15-day window for such changes was established in January 2025.
All ambiguity was finally resolved by the Union Budget 2025, which stated that starting in FY 2025–2026, special-rate incomes—including STCG under Section 111A—will not be eligible for rebate under Section 87A.
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