Section 87A Rebate Applicable on Capital Gains Taxed at Spec – Tax Exemption Guide 2025-2026

Section 87A of the Income Tax Act, 1961 provides a critical tax rebate to eligible resident individuals. Its primary purpose is to reduce the tax liability of low- and middle-income earners to zero, provided their “Total Income” falls within specified statutory thresholds. Unlike a standard deduction which reduces taxable income, this rebate is a direct reduction from the tax payable (before health and education cess).

Applicability for AY 2025-26 (FY 2024-25).

The rules for the rebate differ significantly depending on the tax regime chosen by the taxpayer and the specific amendments introduced in the Union Budget (July 2024).

• New Tax Regime (Default u/s 115BAC): Resident individuals with a Total Income up to ₹7 lakh are eligible for a rebate of up to ₹25,000.
• Old Tax Regime: Resident individuals with a Total Income up to ₹5 lakh qualify for a rebate of up to ₹12,500.
• The “Total Income” Definition: Eligibility is determined based on the Net Taxable Income (after Chapter VI-A deductions like 80C, 80D in the Old Regime). However, while capital gains are included to calculate the threshold (i.e., checking if you are under ₹7L), they are not always eligible for the rebate itself.

Critical Update for AY 2025-26: While the rebate limit remains ₹25,000 under the New Regime, the applicability of this rebate against Special Rate Income (Capital Gains) has been strictly tightened by statutory provisions and the Income Tax Department’s filing utilities.

Importance of the Rebate.

• Zero Tax Liability (Conditional): For taxpayers with salary or business income ≤ ₹7 lakh (New Regime), the rebate effectively makes the tax liability nil.
• Partial Inclusivity: While the rebate applies to normal income, Short Term Capital Gains (under specific conditions), and other sources, it has explicit statutory exclusions for Long Term Capital Gains on equity products.
• Economic Relief: It ensures that individuals with moderate income are not burdened by tax payments, provided their income sources align with rebate-eligible categories.

This section sets the foundation for understanding Section 87A. However, the interaction between this rebate and the fluctuating rates of Capital Gains tax is complex. The following sections detail how recent amendments impact investors.

Understanding Capital Gains Taxed at Special Rates (Updated for Budget 2024).

Capital gains in India are taxed based on asset type, holding period, and transaction date. The Union Budget 2024 (presented July 23, 2024) introduced significant changes to tax rates and definitions, creating a “split” tax treatment for FY 2024-25.

Types of Capital Gains Taxed at Special Rates.

1. Short-Term Capital Gains (STCG) under Section 111A.

• Applicable to: Gains from the sale of listed equity shares, equity-oriented mutual funds, and units of business trusts held for less than 12 months.
• Transaction Date Matters:
  • Transfer before July 23, 2024: Taxed at 15%.
  • Transfer on/after July 23, 2024: Taxed at 20%.
• Rebate Eligibility:
  • Old Regime: Rebate u/s 87A is allowed.
  • New Regime: Technically ambiguous in law, but the ITR Utility currently BLOCKS the rebate against STCG 111A. Taxpayers should expect to pay 20% tax on these gains under the New Regime even if income is below ₹7 Lakh.

2. Long-Term Capital Gains (LTCG) under Section 112A.

• Applicable to: Gains from listed equity/equity-funds held for more than 12 months.
• Tax Rates & Exemptions:
  • Transfer before July 23, 2024: Taxed at 10% on gains exceeding ₹1 Lakh.
  • Transfer on/after July 23, 2024: Taxed at 12.5% on gains exceeding ₹1.25 Lakh (limit increased).
• Crucial Condition: Section 112A(6) explicitly states that the rebate under Section 87A is NOT admissible against tax calculated under Section 112A.

3. Other Special-Rate Capital Gains (Section 112).

• Unlisted Securities, Real Estate, Debt (Legacy):
  • Taxed generally at 20% with indexation (for assets acquired before specific dates) or 12.5% without indexation (new rules post-Budget 2024).
• Rebate Eligibility: The rebate u/s 87A IS AVAILABLE against Section 112 gains (Non-Equity LTCG), provided the total income is within the threshold.

The Statutory Reality: Section 87A vs. Section 112A(6).

Unlike the rumors or AI-generated confusion suggesting a blanket allowance of rebates, the legal reality for AY 2025-26 is governed by a strict reading of the Income Tax Act. There is a specific conflict regarding Equity LTCG that every taxpayer must understand.

The “Non-Obstante” Clause in Section 112A.

Section 112A was introduced to tax Long Term Capital Gains on equity. Sub-section (6) of Section 112A contains a specific override:

“Where the total income of an assessee includes any income referred to in sub-section (1), the rebate under section 87A shall be allowed from the income-tax on the total income as reduced by the tax payable on such income.”

Translation: You calculate your total tax. Then, you remove the tax related to LTCG Equity (112A). The rebate can only be applied to the remainder. You cannot use the ₹25,000 rebate to pay the tax owed on LTCG Equity.

The “New Regime” Controversy (STCG 111A).

For Short Term Capital Gains (STCG 111A), the law is less clear but the execution is strict.

• The Law: Section 115BAC (New Regime) does not explicitly bar the rebate for STCG 111A.
• The Practice (CPC Utility): The Income Tax Department’s processing software (CPC) has adopted an interpretation that restricts the rebate availability against special rate incomes under the New Regime structure.
• Impact: If you file a return claiming a rebate on STCG 111A under the New Regime, you are highly likely to receive a Defective Return Notice or a Demand Notice for the unpaid tax.

Judicial Precedents vs. Statute.

While taxpayers often look for tribunal judgments (like ITAT rulings) to support aggressive claims, it is vital to note:

• No ruling overrides Section 112A(6): No court has allowed a rebate on LTCG Equity because the Act explicitly forbids it.
• Old vs. New Regime Rulings: Most pro-taxpayer rulings regarding STCG rebates apply to the Old Tax Regime. Applying these to the New Regime is risky and currently contested by the tax department.

Eligibility Criteria for Claiming the Rebate (AY 2025-26).

To claim the Section 87A rebate effectively without inviting a tax notice, taxpayers must meet the following verified criteria:

1. Resident Individuals Only.

• The rebate is available only to Resident Individuals.
• NRIs (Non-Resident Indians) are strictly ineligible, regardless of how low their income is.

2. Strictly Adhering to Income Thresholds.

• New Regime: Total Income ≤ ₹7,00,000. (If income is ₹7,00,010, the rebate is lost entirely, and you pay tax on the full amount).
• Old Regime: Total Income ≤ ₹5,00,000.
• Definition of Total Income: This includes Salary, House Property, Other Sources, AND Capital Gains. You cannot exclude Capital Gains to artificially lower your income below the threshold.

3. The “Rebate-able” Components.

You can use the rebate to pay tax on:

• Salary Income (Slab rates)
• Business/Professional Income (Slab rates)
• Interest Income (Slab rates)
• LTCG on Real Estate/Gold (Section 112)
• STCG on Equity (Section 111A) -> Only under Old Regime (safest view).

You CANNOT use the rebate to pay tax on:

• LTCG on Equity/Mutual Funds (Section 112A) – Strict Statutory Bar.
• LTCG on Virtual Digital Assets / Crypto (Section 115BBH) – Strict Statutory Bar.

Step-by-Step Calculation: Real World Scenarios.

The following examples utilize the verified rates for AY 2025-26 and demonstrate where the rebate applies and where it fails.

Scenario 1: The “LTCG Trap” (New Regime).

Profile: Mr. A (Resident, Age 30)
Income: Salary ₹5,00,000 + LTCG (Equity, sold Aug 2024) ₹3,00,000.
Total Income: ₹8,00,000.

Analysis:

Since Total Income (₹8L) exceeds the ₹7L threshold, Mr. A is NOT eligible for any Section 87A rebate. He will pay tax on both salary (slab rates) and LTCG.

Scenario 2: Low Income but LTCG Liability (New Regime).

Profile: Ms. B (Resident)
Income: Business Income ₹4,00,000 + LTCG (Equity, sold Aug 2024) ₹2,50,000.
Total Income: ₹6,50,000 (Eligible for Rebate based on threshold).

Tax Calculation:

1. Tax on Business Income (₹4L): Under New Regime slab (0-3L Nil, 3-6L 5%), tax is ₹5,000.
2. Tax on LTCG (₹2.5L):
   • Exemption: ₹1.25 Lakh (Post-Budget limit).
   • Taxable Gains: ₹1.25 Lakh.
   • Rate: 12.5%. Tax = ₹15,625.
3. Total Gross Tax: ₹5,000 + ₹15,625 = ₹20,625.
4. Rebate Application (Section 87A):
   • Rebate covers tax on “Normal Income” (Business): -₹5,000.
   • Rebate covers tax on LTCG 112A: ₹0 (Banned by Sec 112A(6)).
5. Net Tax Payable: ₹15,625 + 4% Cess = ₹16,250.

Scenario 3: STCG under Old Regime (Successful Claim).

Profile: Mr. C
Income: Salary ₹3,00,000 + STCG (Equity, sold post-July) ₹1,50,000.
Total Income: ₹4,50,000 (Below ₹5L threshold of Old Regime).

Tax Calculation:

1. Tax on Salary (Basic Exemption covers it): ₹0.
2. Tax on STCG (₹1.5L): Taxed at 20% (New Rate). Tax = ₹30,000.
3. Rebate (Old Regime): Max ₹12,500.
4. Net Tax Payable: ₹30,000 – ₹12,500 = ₹17,500 + Cess.

Common Misconceptions and Pitfalls.

With the changing rules, several myths lead to incorrect filings. Here are the corrections.

Myth 1: “My income is ₹6.5 Lakh, so I pay zero tax.”

Reality: This is only true if your income is entirely from salary or business. If your income includes LTCG from Equity (above the exemption limit), you will pay tax on that portion regardless of your total income level.

Myth 2: “I can choose the Old Regime just for Capital Gains.”

Reality: You cannot mix and match. You must choose the Old or New Regime for your entire income tax return. The choice affects your slab rates and your rebate limits simultaneously.

Myth 3: “The Rebate applies to all Capital Gains.”

Reality:

• Section 112A (Equity LTCG): Rebate NEVER applies.
• Section 115BBH (Crypto): Rebate NEVER applies.
• Section 112 (Property/Gold): Rebate APPLIES.

Pitfall: Ignoring the July 23, 2024 Cut-off.

Many taxpayers may calculate tax using the old rates (10% LTCG / 15% STCG) for the whole year. This will lead to a “Short Payment” notice. You must segregate transactions made before and after July 23, 2024, to apply the correct rates (12.5% LTCG / 20% STCG).

Practical Implications and Tax Planning Tips.

Given the strict interpretation of Section 112A(6) and the increased rates in Budget 2024, taxpayers need to plan carefully.

1. Tax Harvesting (LTCG)

Since the exemption limit for LTCG (Equity) has increased to ₹1.25 Lakh per year, investors should try to book profits up to this limit annually. This portion is tax-free by default, so the unavailability of the rebate on this amount does not matter.

2. Choosing the Right Regime

If you have significant Short Term Capital Gains (STCG) and your total income is near ₹5 Lakh:

• Evaluate Old Regime: The rebate of ₹12,500 is definitively allowed against STCG under the Old Regime.
• Evaluate New Regime: While the rebate limit is higher (₹25,000), the ITR utility may block the rebate against STCG. Run a mock calculation in the utility before finalizing your choice.

3. Accurate Reporting in ITR

Ensure you use ITR-2 or ITR-3. In Schedule CG (Capital Gains), explicitly enter the dates of transfer. The utility will automatically apply the 10% vs 12.5% (or 15% vs 20%) rates based on the date. Do not try to manually override the calculated tax to claim a rebate on LTCG 112A, as this will trigger a mismatch notification from the CPC.

For AY 2025-26, the Section 87A rebate remains a powerful tool for salary earners but has lost its flexibility for equity investors. The definitive rule is: You cannot use the rebate to offset tax on Long Term Equity Gains. Understanding this limitation is the key to filing a compliant return and avoiding demand notices.

Disclaimer: This article is updated based on the Finance Act 2024 and Union Budget July 2024. Tax laws are subject to change. Always verify with a Chartered Accountant or the official Income Tax portal before filing.

C.K. Gupta

Hello, I am C.K. Gupta owner of Taxgst.in, a seasoned finance professional with a Master of Commerce degree and over 20 years of experience in accounting and finance. My extensive career has been dedicated to mastering the intricacies of financial management, tax consultancy, and strategic planning. Throughout my professional journey, I have honed my skills in financial analysis, tax planning, and compliance, ensuring that all practices adhere to the latest financial regulations. My expertise also extends to auditing, where I focus on maintaining accuracy and integrity in financial reporting. I am passionate about using my knowledge to provide insightful and reliable financial advice, helping businesses optimize their financial strategies and achieve their economic goals. At Taxgst.in, I aim to share valuable insights that assist our readers in navigating the complex world of taxes and finance with ease.