Is rebate u/s 87A of the Income Tax Act, 1961 available against special rate income

Section 87A is a tax relief provided to individuals, particularly those in the lower-income bracket to ensure that they are not burdened with income tax if their Total Income is below a threshold of Rs. 5,00,000 and Rs. 7,00,000 under old and new tax regime respectively.

The latest Union Budget for FY 2025-26 has raised the tax rebate limit to ₹12 lakh per annum. Additionally, the Section 87A rebate has been increased to Rs. 60,000, up from the previous threshold of Rs. 25,000 under the new tax regime.

The individuals filed their ITR for the AY 2024-25 faced an issue in the form of demand raised by CPC, Bengaluru in the intimation form issued u/s 143(1) of the Act. CPC was not giving benefit of rebate u/s 87A against the special rate incomes and thereby increasing tax liability.

This was because since 05th July, 2024, the income tax department has disabled the option in the utility software to claim rebate u/s 87A against the special rate income like STCG and for those who could claim Section 87A tax rebate on special rate income in their ITR, were later given a tax demand notice.

However, the Bombay High Court, in case of chamber of tax consultants V. Director General of Income Tax (System) on 24.01.2025 has decided the case in favour of the tax payer by stating that Income tax department is wrong in arbitrary modification of utility software for denial of section 87A tax rebate on special rate income. The HC directed the Income Tax Department to fix the ITR utility software and accept all Section 87A tax rebate claims.

However, Smt. Nirmala Sitaram, the finance minister of India while reading the budget specifically excluded the special rate income from the purview of rebate u/s 87A. Therefore, it should be kept in mind by the taxpayers while filing ITRs of FY 2025-26 that even if your income qualifies for a rebate, certain portions may still be taxable if they are subject to special tax rates.