Section 87A rebate gap: BCCI urges Budget 2026 relief for small taxpayers, investors

Budget 2026 expectations: Small taxpayers often miss out on the tax rebate under Section 87A of the Income Tax Act, 1961, when their total income includes short-term capital gains from equity mutual funds or shares, or capital gains from other assets. This anomaly has once again come into focus ahead of the Union Budget 2026, with the Bombay Chamber of Commerce and Industry (BCCI) urging the Finance Ministry to address the issue.

In its Pre-Budget Memorandum for 2026–27, the BCCI has recommended amendments to Sections 111A and 112 of the Income Tax Act to bring them in line with Section 112A(6). The chamber has proposed that small taxpayers should be allowed to claim the Section 87A rebate on their other income, even if their total income includes long-term or short-term capital gains from any capital asset.

Currently, the rebate under Section 87A is not available on tax payable on long-term capital gains (LTCG) from listed equity shares, equity-oriented mutual funds and units of business trusts covered under Section 112A. However, Section 112A(6) allows the rebate to be claimed on the tax payable on other income, after excluding the tax attributable to such capital gains. This limited relief, BCCI points out, is missing in Sections 111A and 112.

Section 111A governs short-term capital gains from equity shares and equity-oriented funds, while Section 112 applies to capital gains from other capital assets. As a result, individuals with taxable income between Rs 2.5 lakh and Rs 7 lakh are denied the Section 87A rebate on their normal income if they earn capital gains under these provisions, increasing their overall tax burden.

The problem has been compounded by recent hikes in capital gains tax rates—under Section 112 from 10% to 12.5%, and under Section 111A from 15% to 20%. BCCI argues that taxpayers are unfairly penalised for what are often one-off capital gains transactions.

To provide relief, the chamber has also suggested raising the income threshold for rebate under Section 87A in the new tax regime from Rs 7 lakh to Rs 12 lakh, and increasing the maximum rebate from Rs 25,000 to Rs 60,000. It further called for rationalising the provision to ensure the rebate does not exceed the tax payable under Section 115BAC, while reiterating that capital gains taxed at special rates would remain excluded from the rebate itself.

Sections 111A and 112 

Sections 111A and 112 of the Income Tax Act govern taxation of capital gains from asset sales. Section 111A applies to short-term capital gains from listed equity shares, equity-oriented mutual funds and business trust units sold within 12 months, provided the transaction is executed on a recognised exchange and subject to STT. Such gains are taxed at a flat 20% for transfers made on or after July 23, 2024. Chapter VI-A deductions are not allowed, though resident individuals can adjust the basic exemption limit. Section 112 covers long-term capital gains from most other assets, including land, buildings, gold and unlisted shares. These gains are generally taxed at 20% with indexation, with specific exceptions allowing lower rates without indexation.

Section 87A explained

Section 87A of the Income Tax Act provides a tax rebate to resident individuals whose total taxable income is below a specified threshold, thereby reducing or fully eliminating their tax liability. The rebate limits vary by tax regime and financial year. Under the new tax regime, for FY 2024–25, individuals with taxable income up to Rs 7 lakh are eligible for a rebate of up to Rs 25,000. For FY 2025–26, this threshold rises to Rs 12 lakh, with a maximum rebate of Rs 60,000. Under the old tax regime, residents with taxable income below Rs 5 lakh can claim a rebate of up to Rs 12,500. In all cases, the rebate cannot exceed the tax payable before cess.

Where Section 87A tax rebate does not apply

Under the New Tax Regime, the Section 87A tax rebate does not apply to income taxed at special rates, such as short-term capital gains (STCG). This means that even if a salaried taxpayer’s income is below Rs 12.75 lakh, any STCG earned will still be taxed at the applicable special rate, without the benefit of the rebate. This rule was clarified in Budget 2025 and applies from FY 2025–26 (AY 2026–27).

Budget 2025 also raised the standard deduction under the New Tax Regime to Rs 75,000, effectively eliminating tax liability for salaried individuals earning up to Rs 12.75 lakh. However, an initial drafting error in Section 115BAC(1A) of the Income Tax Act, 1961 created confusion by limiting the deduction to Rs 50,000 for FY 2025–26. The government subsequently corrected this anomaly through amendments notified in August 2025. Finance Minister Nirmala Sitharaman confirmed in the Lok Sabha on August 13, 2025 that the full Rs 75,000 standard deduction would apply to salaried taxpayers under the new regime.

As per the explanatory memorandum to Budget 2025, the income limit for claiming the Section 87A rebate under the New Tax Regime has been increased from Rs 7 lakh to Rs 12 lakh, while the maximum rebate has been raised from Rs 25,000 to Rs 60,000 for resident individuals taxed under Section 115BAC(1A). The law has also been rationalised to clarify that the rebate cannot exceed the tax payable on slab-rate income under the new regime.

Crucially, the memorandum explicitly states that the Section 87A rebate will not be available on income chargeable at special rates, including short-term capital gains under Section 111A and long-term capital gains under Section 112.

In contrast, under the Old Tax Regime, the Section 87A rebate remains unchanged at Rs 12,500 for individuals with total taxable income, including capital gains, up to Rs 5 lakh.

As a result, while salaried taxpayers earning up to Rs 12.75 lakh can still have zero tax liability under the New Tax Regime, any capital gains taxed at special rates will continue to attract tax, irrespective of overall income levels.