Your short-term capital gains could affect your tax rebate claim

Fresh updates from the financial markets indicate that The Nagpur Income Tax Appellate Tribunal (ITAT) has ruled in favour of a taxpayer who claimed the Section 87A tax rebate on short-term capital upside (STCG) taxable under Section 111A. The Tribunal dismissed the Income Tax Department’s appeal and upheld the taxpayer’s eligibility for a Rs 23,494 rebate.

The ruling is relevant for taxpayers who opted for the new tax regime and earned STCG under Section 111A during Assessment Year (AY) 2025-26. The Tribunal observed that the law applicable for the relevant assessment year did not expressly prevent a taxpayer from claiming the Section 87A rebate against tax payable on such upside. What is the case?

The case involved a taxpayer who filed an income-tax return for AY 2025-26 under the new tax regime. The taxpayer had total income of around Rs 6.91 lakh, including salary, capital upside and income from other sources, and claimed a Section 87A rebate of Rs 23,494.

While processing the return under Section 143(1), the Centralised Processing Centre (CPC) denied the rebate. This resulted in an additional tax demand of Rs 16,160. The taxpayer challenged the denial, following which the Commissioner of Income Tax (Appeals) allowed the rebate.

The Income Tax Department then challenged the decision before the Nagpur ITAT. The Topline argued that the Section 87A rebate could not be allowed against tax payable on STCG taxed at the special rate under Section 111A.

The department additionally referred to CBDT Circular No. 13/2025 dated 19 September 2025 and argued that the rebate was not intended to apply against income taxed at special rates.

Why did the ITAT allow the rebate?

The Nagpur ITAT noted that for relevant assessment year, Section 87A did not specifically exclude STCG covered under Section 111A from the rebate.

The Tribunal additionally distinguished between STCG under Section 111A and certain long-term capital upside covered under Section 112A. While the law contains a specific restriction on the Section 87A rebate in respect of tax payable on specified long-term capital upside, there was no similar restriction for STCG under Section 111A for the assessment year under consideration.

The Tribunal relied on earlier ITAT decisions that had taken a similar view and held that the rebate could not be denied merely because a portion of the taxpayer's income was taxed at the special rate under Section 111A.

The Topline's appeal was consequently dismissed and the Section 87A rebate of Rs 23,494 was upheld.

Does this mean all taxpayers can claim the rebate?

Not necessarily. An ITAT ruling is binding on the parties to that particular case and does not automatically provide relief to every taxpayer across the country. That stated, such decisions can have persuasive value for taxpayers with similar facts, particularly when several Tribunal benches have taken a consistent position.

The key point is additionally the assessment year involved. The tax provisions governing the Section 87A rebate have subsequently been amended to specifically deal with income taxable at special rates. As a result, taxpayers should not assume that the ruling applies in the same manner to later assessment years.

For taxpayers whose Section 87A rebate on STCG under Section 111A was denied for AY 2025-26, the Nagpur ITAT ruling could provide judicial backing for challenging the denial, depending on the facts of their case and the applicable legal remedies.