Capital Gains & Income Tax Notices: What You Need to Know About Section 87A

Overview

One important clause in the Indian Income Tax Act that enables qualified taxpayers to receive a refund on their income tax bill is Section 87A. However, many taxpayers—particularly those who make capital gains—have received tax notifications as a result of the most recent revisions and changes to Budget 2025. This has led to misunderstandings about the terms and availability of the refund. This blog post will explain the guidelines for the refund and address the reasons why people with capital gains income are getting Section 87A tax letters.

Recognizing the Section 87A Rebate

Individual taxpayers can receive relief under Section 87A of the Income Tax Act by claiming a refund on their whole tax due provided that their taxable income is below a certain threshold. The main modifications to Section 87A as per Budget 2025 are as follows:

• Increased Rebate Limit: Under the new tax regime, the refund is now available to anyone with taxable incomes up to ₹12 lakh (it was formerly ₹7 lakh).
• Maximum Rebate Allowed: The maximum refund under Section 87A is still ₹25,000, which was previously ₹7,500 under the previous administration and ₹12,500 under the current one.
• Applicability: Firms, HUFs, or businesses are not eligible for this refund; only resident people are.

Why Do Notices Get Sent to Taxpayers Who Have Capital Gains?

The following factors are causing many taxpayers with capital gains income to get tax letters even with the enhanced rebate limit:

1. Capital Gains Are Not Eligible for Rebates

• The fact that capital gains from the sale of specific assets are not eligible for the Section 87A refund is one of the main causes of the misconception.
• The refund does not apply to long-term capital gains (LTCG) that exceed ₹1 lakh in your taxable income.
• Section 111A's short-term capital gains (STCG), which include the sale of equity shares and equities-oriented mutual funds, are not eligible for the rebate since they are subject to a fixed 15% tax rate.

2. Inaccurate Rebate Claim

• Unaware that capital gains income is not taken into account when determining eligibility for the Section 87A refund, some taxpayers have made the error of claiming it.
• The taxpayer is not eligible for the refund if their total income, excluding exempt LTCG, is more than ₹12 lakh.
• These people have received notifications from the tax department requesting that they either correct their returns or pay the outstanding taxes.

3. Inconsistency in Income Reporting

• Taxpayers may obtain an income tax notice under Section 143(1) or Section 139(9) for faulty return filing if they do not accurately state their capital gains income in their ITR.
• Notices have been issued as a result of income reporting inconsistencies found through cross-verification of revenue from Form 26AS, AIS (Annual Information Statement), and Form 16.

4. The Old and New Tax Regimes Are Confusing

• Only under the new tax system (Section 115BAC) is the higher refund ceiling of ₹12 lakh applicable. However, the previous ₹5 lakh refund ceiling still applies to taxpayers who choose the old tax regime.
• The tax authority has recognized those who unintentionally filed their taxes under the old regime yet received the new regime refund.

How Should I Answer the Notice of Income Tax?

Take the following actions if you have received a tax notice about capital gains and the Section 87A rebate:

• Review Your ITR: When claiming the refund, review your ITR to see whether you have included any prohibited capital gains.
• Cross-Check with AIS & 26AS: Confirm the information about your income that the tax agency has on file.
• File a Revised Return: Before the deadline, file a revised return in accordance with Section 139(5) if an error is discovered.
• Answer the Notice by Sending in a Response: Respond via the income tax e-filing site within the allotted time frame if the tax department has requested explanation.
• Seek Professional Assistance: To avoid fines, speak with a tax expert or certified public accountant if you have any questions regarding the refund claim.

Important Takeaways

• STCG taxed at 15% and LTCG over ₹1 lakh are not eligible for the Section 87A rebate.
• Under the current system, the refund is only available to those with taxable income up to ₹12 lakh (excluding exempt LTCG).
• To prevent inconsistencies and tax notifications, taxpayers must make sure that their income is reported accurately.
• If a notification is received, reply right away with any explanations or revisions that are required.

Conclusion

Many taxpayers are confused and have received tax notifications as a result of recent changes to the capital gains tax and Section 87A refund regulations. To prevent fines and compliance problems, it is crucial to comprehend the qualifying requirements and make sure that your tax return is filed accurately. To remain in compliance with the tax regulations, take immediate action after receiving a tax notice by confirming your income information and correcting any mistakes.

To guarantee accuracy in your ITR filings and prevent unforeseen tax notifications, think about speaking with experts at myITRonline for hassle-free tax filing and professional advice!

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