A recent update to the Income Tax Department’s filing system has left many taxpayers scratching their heads — and paying more than they should. The problem? A glitch in how the portal handles Section 87A rebate claims, especially for those with incomes that include short-term capital gains.
The Section 87A rebate was designed to ease the tax burden for lower-income earners. Under the new tax regime, anyone with an annual income of up to ₹7 lakh is eligible for a rebate of up to ₹25,000, effectively bringing their tax liability to zero. In the old tax regime, this benefit applies to incomes up to ₹5 lakh, with a maximum rebate of ₹12,500.
Where the Trouble Began
Until July 5, 2024, taxpayers with incomes under ₹7 lakh — even those with short-term capital gains — could claim the rebate without issue. But after a portal update, the system began blocking rebate claims if the income included “special rate income” such as profits from selling shares or mutual funds held for less than a year.
For instance, if you earn ₹5 lakh in salary and ₹2 lakh from short-term capital gains, your total income is ₹7 lakh. The law for financial year 2024-25 says you should still get the ₹25,000 rebate. But the updated system is denying it, forcing you to pay tax on the ₹2 lakh gains.
What the Law Says vs. What the System Does
Tax experts say the glitch stems from applying Budget 2025 changes prematurely. From April 1, 2025 (FY 2025-26), the rules will indeed block rebates for incomes that include certain special rate incomes like short-term capital gains. At the same time, the income limit in the new tax regime will rise to ₹12 lakh, with a maximum rebate of ₹60,000.
But for FY 2024-25, the restriction applies only to specific long-term capital gains taxed under Section 112A, not short-term ones. The portal, however, seems to have jumped the gun, implementing next year’s rule this year.
Impact on Taxpayers
This glitch is particularly hitting small investors who rely on modest gains from shares or mutual funds. Some will end up paying tax they shouldn’t, while others may incorrectly get rebates they aren’t entitled to, potentially leading to notices later.
Chartered accountants like Mayank Mohanka have warned that without a quick fix, the issue could cause confusion, financial strain, and compliance headaches for thousands of taxpayers before the filing deadline.
The Road Ahead
The government’s upcoming rebate expansion in FY 2025-26 is welcome news, but experts are urging the tax department to correct the system immediately for the current year. Until then, taxpayers facing this issue should seek professional guidance to ensure their returns are accurate and compliant.
In a time when tax technology is supposed to simplify lives, this glitch is a reminder that even small coding errors can have a big impact on people’s pockets.
