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The Central Board of Direct Taxes (CBDT) has once again clarified that tax exemption will not be given on specifically prescribed incomes such as short -term capital gains under Section 87A. Many taxpayers had also claimed tax exemption on short-term capital gains in FY 2023-24, but the Income Tax Department has rejected these requests and asked them to pay dues. Now, the Income Tax Department has also asked taxpayers, including taxpayers who were earlier mistakenly exempted, to pay tax by 31 December 2025.
What is the whole matter?
From July 2024, the Income Tax Department has refused to give tax exemption to taxpayers whose total income was less than Rs 7 lakh (applicable under the new tax system). The range also includes short-term capital gains (STCG), which was imposed 15 percent tax in the financial year 2023-24 and increased it from 2024-25 to 20 percent. According to the Income Tax Rules, there is a discount on income up to ₹ 5 lakh (about ₹ 5 lakh) in the old tax system and income of up to ₹ 7 lakh (about ₹ 7 lakh) in the new tax system, which makes the tax liability zero. However, after July 5, 2024, when the ITR software was updated, those who filed their income tax returns did not get exemption on short -term capital gains.
Taxpayers approached the Bombay High Court on this issue. In December 2024, the court ordered the Income Tax Department to give taxpayers an opportunity to improve their returns and reconsider their matters. Subsequently, taxpayers were given 15 days time from January 1 to January 15, 2025 to update their returns, while the normal time limit for filing or improvement is 31 December. Many taxpayers had improved their returns in the hope of getting a discount on STCG. However, in February 2025, several taxpayers received notice to pay outstanding taxes.
Meanwhile, the Union Budget 2025 has clarified that from the financial year 2025-26, all special rate income discounts, including short-term capital gains (under Section 111A), will not be available. This section is related to tax on short -term capital gains from the sale of listed shares and equity mutual funds.
CBDT circular
It has been observed that in some cases, the return has already been processed and income tax has been paid at a special rate under Section 87A. In such cases, improvement is necessary to cancel the incorrectly given exemption. The CBDT circular issued on September 19 stated that if the outstanding tax is paid late, interest will be charged under Section 220 (2). However, the Income Tax Department has decided that if the tax is paid by December 31, 2025, the interest will be waived.
What is the way forward?
Such taxpayers now have two options: either pay the amount or knock the court door. If the amount is low, it is better to pay the dues to be paid. The Income Tax Department has made it clear that the discount will not be given. The amendment of Budget 2025 is effective from FY 2025-26, but given the department’s stance, if claimed, it is difficult to get exemption for the financial year 2024-25 (for which the return assessment was filed in the year 2025-26).
However, if the taxpayer pays the demand on or before on 31 December, 2025, the interest will be waived. In addition, it has been observed that several Income Tax Appellate Tribunals have ruled in favor of taxpayers on the issue, but this circular clarifies that the Income Tax Department will not give the benefit of exemption.