Why was the 87A rebate denied on my capital gains? From AY 2026-27 (FY 2025-26), the Finance Act 2025 says the Section 87A rebate under the new regime cannot reduce tax on income taxed at special rates, such as short-term capital gains under Section 111A and long-term capital gains under Section 112A. Capital gains still count toward the Rs 12 lakh income limit, but the Rs 60,000 rebate only wipes out tax on your normal income. If your return claimed the rebate against capital gains tax, CPC will reduce it under Section 143(1) and raise a demand. For AY 2026-27, that demand is usually correct.
You filed your ITR expecting zero tax. Your income was under Rs 12 lakh, so the Section 87A rebate should have covered everything. Then the Section 143(1) intimation arrived with a demand, because part of your income was short-term capital gains from shares or equity mutual funds.
This guide explains why the rebate was restricted, how to check whether the demand is right, and when to pay, rectify or appeal.
The Rule for AY 2026-27
Three points decide the outcome under the new tax regime for FY 2025-26:
| Rule | What it means |
|---|---|
| Income limit | Total income, including capital gains, must not exceed Rs 12,00,000 to get the rebate |
| Maximum rebate | Rs 60,000 |
| Special-rate income excluded | The rebate cannot reduce tax on STCG under Section 111A (20%), LTCG under Section 112A (12.5%) or other income taxed at special rates |
So the rebate is the lower of Rs 60,000 and the tax on your normal income (salary, interest, rent and so on). Tax on capital gains taxed at special rates is payable in full, plus 4% cess.
The exclusion for special-rate income was written into Section 87A by the Finance Act 2025, effective from AY 2026-27. Before that, the new-regime rebate was Rs 25,000 for income up to Rs 7 lakh, and whether it could offset STCG tax was disputed (see the section on earlier years below).
Worked Example: Salary Rs 10 Lakh + STCG Rs 1.5 Lakh
Facts (new regime, FY 2025-26):
- Gross salary: Rs 10,00,000
- STCG on equity mutual funds (Section 111A): Rs 1,50,000
- No other income
| Particulars | Amount |
|---|---|
| Gross salary | Rs 10,00,000 |
| Less: standard deduction | Rs 75,000 |
| Salary income | Rs 9,25,000 |
| Add: STCG under Section 111A | Rs 1,50,000 |
| Total income | Rs 10,75,000 (within Rs 12 lakh, so rebate available) |
| Tax on normal income of Rs 9,25,000 (Rs 20,000 + Rs 12,500) | Rs 32,500 |
| Tax on STCG at 20% | Rs 30,000 |
| Tax before rebate | Rs 62,500 |
| Less: Section 87A rebate (limited to tax on normal income) | Rs 32,500 |
| Tax after rebate | Rs 30,000 |
| Add: 4% cess | Rs 1,200 |
| Tax payable | Rs 31,200 |
If the return instead claimed a rebate of Rs 60,000 against the total tax of Rs 62,500, it would have shown almost no tax. CPC recomputes the rebate at Rs 32,500 and raises a demand of about Rs 31,200, plus interest under Sections 234B and 234C if advance tax was not paid.
Can the basic exemption limit reduce the STCG tax? Only if your normal income is below the basic exemption limit (Rs 4 lakh in the new regime). A resident can use the unused part of the exemption against STCG. Here, salary income of Rs 9.25 lakh already uses the full Rs 4 lakh, so nothing is left to adjust.
How to Check Your 143(1) Intimation
Download the intimation from the e-filing portal (or the password-protected PDF sent by email) and compare it with your return:
| Check | In your ITR | In the intimation |
|---|---|---|
| Capital gains taxed at special rates | Schedule CG and Schedule SI | "As computed under Section 143(1)" column |
| Rebate under Section 87A | Part B-TTI | Rebate allowed by CPC |
| Tax on total income | Part B-TTI | Recomputed tax |
| TDS and advance tax | Schedule TDS / IT | Credits allowed |
| Interest under 234B / 234C | Part B-TTI | Recomputed interest |
If the only difference is the rebate, and the year is AY 2026-27, CPC has applied the law correctly. If the difference is somewhere else, such as a missing TDS credit or wrongly classified income, that is a separate error you can rectify. Our Section 143(1) intimation guide explains each column.
Pay, Rectify or Appeal?
| Situation | What to do |
|---|---|
| AY 2026-27, demand is only the rebate restricted on STCG/LTCG tax | Pay the demand. The law excludes special-rate income from the rebate. |
| Demand includes a CPC mistake (TDS credit missed, gains taxed twice, wrong rate) | File a rectification under Section 154 for that mistake. |
| Earlier year (AY 2024-25 or AY 2025-26), rebate denied on STCG tax | Get advice. The position for those years is disputed; see below. |
| Rectification rejected and the amount is significant | Appeal to CIT(A) in Form 35, within 30 days of the demand or order. |
Paying the demand: respond on the e-filing portal under Pending Actions > Response to Outstanding Demand, choose "Demand is correct", and pay through Challan 280 (Type of Payment: 400, Tax on Regular Assessment). Paying promptly stops further interest under Section 220(2) and prevents the demand from being adjusted against future refunds under Section 245.
Earlier Years: AY 2024-25 and AY 2025-26
For these years the Income Tax Act did not expressly bar the new-regime rebate from offsetting tax on STCG under Section 111A. The express exclusion arrived with the Finance Act 2025, from AY 2026-27. The e-filing utilities for AY 2024-25 were nevertheless changed in July 2024 to stop the rebate against special-rate income. Taxpayers challenged this before the Bombay High Court, and the deadline for belated and revised returns for AY 2024-25 was extended to January 15, 2025 so the claim could be made.
Two things limit how far this helps:
- The limits were lower. For AY 2024-25 and AY 2025-26, the new-regime rebate was at most Rs 25,000, for total income up to Rs 7 lakh. If your total income including capital gains was above Rs 7 lakh, there was no rebate to claim.
- The issue is being litigated. Some taxpayers have contested these demands through rectification and appeal, with varying results. If your income was within Rs 7 lakh and the demand is significant, get the return and the intimation reviewed before deciding.
LTCG under Section 112A was never covered. Section 112A has always required the rebate to be computed on tax excluding tax on those long-term gains, in every year and both regimes.
How to File a Rectification Under Section 154
Use rectification for genuine CPC errors, not to re-argue the AY 2026-27 rebate rule.
- Log in at incometax.gov.in.
- Go to Services > Rectification and click New Request.
- Select Income Tax and the assessment year.
- Choose the request type: Reprocess the return (for a processing error), Tax credit mismatch correction (for TDS or advance tax not credited), or Return data correction (if your own return needs corrected schedules).
- Enter the details and submit.
- Track it under Services > Rectification > View filed requests.
Rectification can be sought within four years from the end of the financial year in which the order was passed. For the full process, see our Section 154 rectification guide. For appeals, see the CIT(A) appeal in Form 35 guide.
Avoiding the Demand Next Year
| Step | Why it helps |
|---|---|
| Compute the rebate on normal income only | CPC will recompute it anyway; claiming more only creates a demand with interest |
| Pay advance tax on capital gains | Tax on STCG and LTCG is payable even if your salary income is fully covered by the rebate. Missing advance tax adds interest under 234B/234C. See the advance tax interest guide. |
| Remember gains count toward Rs 12 lakh | Large gains can push total income above Rs 12 lakh and remove the rebate on your salary too |
| Use the Rs 1.25 lakh LTCG exemption | LTCG on listed equity up to Rs 1.25 lakh a year is exempt under Section 112A; holding past 12 months turns 20% STCG into 12.5% LTCG above that |
| Use ITR-2, not ITR-1, when you have capital gains | Capital gains need Schedule CG, which ITR-1 does not have (except limited 112A gains) |
For rates on each asset class, see the capital gains tax rates ready reckoner and mutual fund taxation.
Key Takeaways
- From AY 2026-27, the Rs 60,000 new-regime rebate cannot reduce tax on STCG (111A) or LTCG (112A).
- Capital gains still count toward the Rs 12 lakh income limit.
- A 143(1) demand for AY 2026-27 that only restricts the rebate on capital gains tax is usually correct: pay it to stop interest.
- Use Section 154 rectification for real CPC errors such as missed TDS credit.
- For AY 2024-25 and AY 2025-26, the rebate was only Rs 25,000 for income up to Rs 7 lakh, and the STCG question is disputed.
How Tax Garden Helps
Tax Garden reviews your 143(1) intimation against your return, tells you whether the demand is correct, and either files the rectification or helps you pay and close it. When you file next year, we compute the rebate and capital gains tax correctly so CPC has nothing to adjust. ITR filing starts at Rs 1,500 for ITR-1, and ITR-2 for capital gains is Rs 4,000. For the full rebate rules, see our Section 87A rebate guide for AY 2026-27.
Looking for expert help with 143(1) demand reviews? The team at Tax Garden, based in Kondapur, Hyderabad, helps Indian SMEs stay compliant. End-to-end filings, notices, and deadline tracking, all in one place.
87A Rebate on Capital Gains: Frequently Asked Questions
Why was my 87A rebate denied on STCG?
From AY 2026-27, the Finance Act 2025 bars the new-regime Section 87A rebate from reducing tax on income taxed at special rates, including STCG under Section 111A and LTCG under Section 112A. CPC recomputes the rebate on your normal income only and raises a demand for the difference.
Do capital gains count toward the Rs 12 lakh limit for 87A?
Yes. Total income, including capital gains, must not exceed Rs 12 lakh for the rebate. The gains count toward the limit, but the rebate cannot reduce the tax on them.
Is the 143(1) demand for AY 2026-27 correct?
If the only adjustment is the rebate restricted against capital gains tax, it is usually correct under the law as amended by the Finance Act 2025. Pay it through the e-filing portal to stop interest. If there are other errors, such as missing TDS credit, file a rectification for those.
Can I claim the 87A rebate on STCG for AY 2025-26?
For AY 2025-26 the new-regime rebate was up to Rs 25,000 for total income up to Rs 7 lakh. The Act did not expressly bar it against STCG before the Finance Act 2025, but the department's utilities restricted it and the issue is disputed. If your income was within Rs 7 lakh, get the demand reviewed before paying or appealing.
Can the basic exemption limit be used against STCG?
Yes, for residents, but only the part of the basic exemption limit not used by normal income. If your salary or other normal income is already above Rs 4 lakh (new regime), there is nothing left to set off against STCG.
How do I pay a 143(1) demand?
On the e-filing portal, go to Pending Actions > Response to Outstanding Demand, select that the demand is correct, and pay through Challan 280 with type of payment 400 (Tax on Regular Assessment).
How long do I have to file a rectification under Section 154?
Four years from the end of the financial year in which the intimation or order was passed.
Does the old regime allow the 87A rebate on STCG?
Under the old regime the rebate is up to Rs 12,500 for total income up to Rs 5 lakh. It can offset tax on STCG under Section 111A but not tax on LTCG under Section 112A. It only helps if your total income is within Rs 5 lakh.
What is the STCG tax rate on equity for FY 2025-26?
20% under Section 111A for listed equity shares and equity-oriented mutual funds, plus 4% cess. LTCG under Section 112A is 12.5% on gains above Rs 1.25 lakh a year.
Based on Sections 87A, 111A, 112A, 115BAC, 143(1), 154, 220(2) and 245 of the Income Tax Act, 1961, as amended by the Finance (No. 2) Act, 2024 and the Finance Act, 2025. The position for AY 2024-25 and AY 2025-26 is subject to ongoing litigation. Verify on incometax.gov.in and get your intimation reviewed before acting. This article is general information, not advice for your specific demand.
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