CBDT Waives Interest on Sec. 87A Rebate Demands

Circular No. 13 /2025 dated 23-09-2025

1. Introduction

The Central Board of Direct Taxes (CBDT) has recently issued a circular addressing an important issue faced by taxpayers regarding the disallowance of rebate under section 87A of the Income-tax Act, 1961. The clarification specifically pertains to incomes that are chargeable to tax at special rates under Chapter XII of the Act. By issuing this circular, the CBDT seeks to provide relief to affected taxpayers and ensure smoother compliance with the law.

2. Background on Section 115BAC(1A)

Under the provisions of section 115BAC(1A), taxpayers can opt for the new tax regime with concessional tax rates. However, this section operates subject to the provisions of Chapter XII of the Act. Consequently, incomes that are taxed at special rates—such as capital gains, winnings from lotteries, or certain other specified incomes—are excluded while determining tax liability under section 115BAC(1A). This distinction has been central to the issue that led to the current clarification by the Board.

3. Issue Identified by the CBDT

The CBDT observed that in several cases, income tax returns were processed incorrectly, and taxpayers were granted rebate under section 87A on income that was in fact chargeable at special rates. Such rebates were wrongly allowed, contrary to the provisions of law. When rectifications were carried out, the incorrect rebate had to be withdrawn, which led to additional demands being raised on taxpayers. This not only created unexpected liabilities but also triggered interest charges under section 220(2) in cases where demand payments were delayed.

4. Waiver of Interest to Reduce Hardship

Recognising the genuine hardship this situation created for taxpayers, the CBDT has stepped in with a measure of relief. The circular directs that interest payable under section 220(2) shall be waived in cases where such demands are paid on or before 31st December 2025. This ensures that taxpayers who settle their demands within the stipulated timeframe will not face the additional burden of interest, thereby mitigating financial stress and uncertainty caused by these rectifications.

5. Conclusion

Through this circular, the CBDT has reaffirmed its commitment to taxpayer welfare while maintaining compliance with the Income-tax Act. By waiving the interest liability in cases where incorrect rebates under section 87A were earlier allowed, the Board strikes a balance between enforcing legal provisions and reducing hardship for taxpayers. The move not only promotes fairness in tax administration but also provides affected individuals with a clear timeline to resolve their outstanding demands without incurring further penalties.

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