Circular No. 13/2025 dated 19th September 2025 Issued by: Central Board of Direct Taxes (CBDT)
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Background
The Finance Act, 2023, revamped the new tax regime under Section 115BAC(1A) effective from AY 2024–25, providing simplified slab rates for individuals and HUFs. Along with this, a modified rebate under Section 87A was introduced — granting full relief if total income does not exceed Rs 7 lakh.
While implementing the new regime, a crucial interpretational issue arose:
- Should rebate under Section 87A be allowed even when a part of the income is taxed at special rates (such as capital gains under Sections 111A, 112, 112A, etc.)?
Many returns were processed by CPC, granting the rebate even in such cases — effectively nullifying tax on special-rate income if the total income remained within Rs 7 lakh. The CBDT has now addressed this issue through its Circular No. 13/2025.
Essence of the Circular
- The circular clarifies that “Incomes chargeable to tax at special rates under Chapter XII of the Act shall not be included while determining the chargeability to tax under Section 115BAC(1A).
- Accordingly, the rebate under Section 87A(b) applies only to income taxed under the slab rates of Section 115BAC(1A) and not to income taxed at special rates (like capital gains, winnings, etc.).
The Problem Identified
CBDT noticed that:
- Many returns under the new regime were processed, granting Section 87A rebate on total tax, including special rate income.
- Upon rectification, such rebates needed to be disallowed, leading to additional demand and consequential interest under Section 220(2).
- To reduce taxpayer hardship, CBDT ordered waiver of interest under Section 220(2) if such demands are paid on or before 31.12.2025.
Legal Analysis
- Section 87A – Rebate
- Provides deduction from “income-tax payable on total income” if the total income does not exceed Rs 7 lakh (for those opting under Section 115BAC(1A)).
- Section 115BAC(1A)
- Applies subject to other provisions of Chapter XII.
- Only residual income is taxed at 115BAC(1A) slab rates.
- Special rate incomes (under Sections 111A, 112, 112A, 115BB, etc.) are excluded from slab computation.
Hence, according to CBDT, the rebate of Rs.25,000 is linked only to slab-rate tax, not to special rate tax components.
The Contradictory View (Literal Interpretation)
From a strict legal reading, Section 87A refers to:
- “Income-tax payable on the total income of an assessee.”
- And as per Section 2(45), “total income” includes all income computed under the Act, including those taxed at special rates.
Therefore, it can be argued that Special rate income (e.g., STCG, LTCG) forms part of total income. Hence, a rebate under Section 87A should apply against the entire tax liability, including tax on special-rate income, as long as the total income is ≤ Rs 7 lakh.
CBDT’s Rationale
CBDT relies on the legislative intent behind the Finance Act, 2023 amendments, as explained in the Memorandum:
- “The rebate under section 87A will be available only to individuals opting for the new tax regime and having total income up to Rs 7 lakh, excluding income which is taxable at special rates.”
Thus, the policy intent is to provide rebate relief only on ordinary income under the 115BAC slab system, not on special-rate income.
Implications for Taxpayers
| Total Income | Nature of Income | 87A Rebate Allowed? |
| Rs.6.8 Lakh – all from salary | Normal income only | Yes |
| Rs.5 lakh salary + Rs.1.8 lakh LTCG u/s 112A | Includes special rate income | No (rebate restricted to slab-rate portion) |
| Rs.6.9 lakh business income (no special-rate income) | Normal income only | Yes |
| Rs.4.5 lakh salary + Rs.2 lakh STCG u/s 111A) | Includes special rate income | No (rebate restricted to slab-rate portion) |
Hence, those having capital gains, lottery income, or other special-rate income will not get a full rebate under Section 87A(b) even if their total income is ≤ Rs.7 lakh
Relief under Circular 13/2025
- Where demands arise only because of such 87A rebate rectifications, interest under Section 220(2) shall be waived if the demand is paid on or before 31.12.2025.
- After that date, normal interest provisions will apply.
Conclusion
- While CBDT’s clarification ensures administrative uniformity, the literal reading of the law favors taxpayers — since “total income” includes special-rate income.
- Thus, the issue remains debatable and may ultimately require judicial determination if contested.
- Until then, CBDT’s interpretation under Section 119 will be binding on all income-tax authorities.
- The divergence between statutory language and policy interpretation once again highlights the complexity of the new regime.
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