No Tax Rebate on Gains from Shares and Mutual Funds, Says CBDT; Pay Dues by December 31 Without Interest

The Central Board of Direct Taxes (CBDT) has once again clarified that the Section 87A rebate will not apply to special-rate incomes, such as short-term capital gains (STCG) on shares and mutual funds. This decision affects thousands of taxpayers who claimed rebates on such income for the financial year 2023–24.

While the Income Tax Department has rejected these rebate claims, it has provided relief by allowing taxpayers to pay the pending dues without interest until December 31, 2025. After this date, interest under Section 220(2) will be applicable on any unpaid amount.

Why the Rebate Is Not Allowed

Under the income tax framework, rebates under Section 87A are available only on regular income up to ₹5 lakh (old regime) and ₹7 lakh (new regime). However, this benefit is not applicable to income taxed at special rates, including:

• Short-term capital gains (STCG) under Section 111A on listed shares and equity mutual funds.

• Other incomes taxed at prescribed special rates.

For FY 2023–24, STCG was taxed at 15%. From FY 2024–25 onwards, the rate was increased to 20%. Despite this, many taxpayers claimed a rebate on STCG, leading to disputes.

Timeline of Events

• July 2024: The Income Tax Department stopped granting Section 87A rebate on STCG. Taxpayers filing returns after July 5, 2024, when the ITR software was updated, were not allowed this benefit.

• Court Intervention: Several taxpayers challenged the denial in the Bombay High Court. In December 2024, the court directed the department to allow taxpayers to revise returns and reconsider claims. A special window between January 1 and January 15, 2025 was given for updates.

• February 2025: Despite revised filings, many taxpayers received notices asking them to pay pending taxes.

• Union Budget 2025: The government officially amended tax provisions, clarifying that from FY 2025–26 onwards, rebate will not apply to STCG or any other special-rate income.

CBDT’s Latest Circular

In its September 19, 2025 circular, CBDT confirmed that:

• Any rebate wrongly granted in earlier assessments will be reversed.

• Taxpayers must clear pending dues by December 31, 2025 to avoid additional interest.

• Interest under Section 220(2) will be waived only if payment is made before the deadline.

The circular further noted that in some cases, refunds or rebates were incorrectly processed by the system. These errors are now being corrected, and taxpayers who benefited earlier are being asked to return the excess.

What Options Do Taxpayers Have?

Affected taxpayers essentially have two options:

1. Pay the dues by the December deadline and settle the matter without litigation.

2. Challenge the demand in court, although experts believe this is practical only for cases involving significant amounts.

Given that multiple Income Tax Appellate Tribunal (ITAT) rulings have gone in favor of taxpayers, there is some legal ground to contest. However, the CBDT’s stance and the Union Budget amendment make it unlikely that rebates on STCG will be accepted for FY 2024–25.

Key Takeaways for Investors

• No rebate on STCG from shares and equity mutual funds under Section 111A.

• Section 87A rebate continues for incomes below the threshold, but only for regular taxable income.

• Taxpayers must ensure accurate filing to avoid future disputes.

• Pending dues must be cleared by December 31, 2025 to benefit from the interest waiver.

Bottom Line

The clarification from the CBDT settles the long-standing confusion over rebates on capital market earnings. While this may disappoint small investors who believed they could offset gains with Section 87A benefits, the relief lies in the interest waiver window until December 31, 2025. Tax experts advise taxpayers to clear dues on time, as prolonged litigation may not yield favorable outcomes under the amended rules.