Section 87A Rebate vs Capital Gains: Why ₹60,000 Won't Cover Your Stock Profits in AY 2026-27
The ₹60,000 rebate under Section 87A for AY 2026-27 does not apply to short-term or long-term capital gains taxed at special rates under Sections 111A and 112A. Even if your total income is under ₹12 lakh, you will owe tax on equity mutual fund and share sale profits. This guide explains the compartmentalisation rule and what to check before filing.
CA Harun Raaj
Chartered Accountant · Harun Raaj & Associates
Legal basis: Section 87A, Income-tax Act, 1961 (as amended by Finance Act 2025). The bar on rebate against income taxed at special rates applies from Assessment)-compliance)) Year 2026-27. Source: incometaxindia.gov.in/pages/acts/income-tax-act.aspx#section87A-fa2025. Last reviewed by CA Harun Raaj: January 2025.
If your total income for FY 2025-26 is under ₹12 lakh, you may assume you owe zero tax under the new regime. For most of your income, that is true. But if part of that income is capital gains from shares or equity mutual funds, you will still get a tax demand — and every ITR season this catches thousands of filers by surprise.
Here is exactly how Section 87A rebate interacts with capital gains for Assessment Year 2026-27 (Financial Year 2025-26), and what to check before you file.
How Section 87A Works in AY 2026-27
Section 87A gives a resident individual a direct reduction in tax payable—a rebate, not a deduction. The Finance Act 2025 revised the rebate amount and introduced a critical limitation:
- New tax regime (the default under Section 115BAC(1A)): rebate of up to ₹60,000 where total income does not exceed ₹12,00,000 (increased from ₹25,000 up to ₹7,00,000).
- Old tax regime: rebate of up to ₹12,500 where total income does not exceed ₹5,00,000 (unchanged).
The catch: the same Finance Act 2025 amendment expressly bars the 87A rebate from applying to income taxed at special rates. This means the rebate cannot reduce tax on capital gains computed under these provisions:
Key point: The rebate and special-rate capital gains live in separate tax compartments; the rebate cannot be applied to wipe out tax in the capital gains compartment, even if your total income stays below ₹12 lakh.
Why This Matters
Think of your tax computation as two watertight compartments:
- Compartment A (Normal Income): Salary, business profit, interest, rent — taxed at the regular slab rates. The ₹60,000 rebate applies here and can reduce this tax to zero.
- Compartment B (Special-Rate Capital Gains): STCG under 111A (20%) and LTCG under 112A (12.5% above exemption). The rebate never enters this compartment—tax here is computed separately and is always payable.
Even if Compartment A shows zero tax after the rebate, you still owe whatever tax Compartment B computes. Your total income crossing or staying under ₹12 lakh does not change this rule.
Who Is Affected
- Salaried individuals and pensioners who also sell shares or equity mutual funds during the year.
- Small investors and first-time filers who assumed the ₹12 lakh income cap means zero tax across all income types.
- HUFs and resident individuals with mixed salary / business income and listed-security capital gains.
- Anyone filing ITR-2 (capital gains) or ITR-3/4 (business with securities sales) for AY 2026-27.
Non-residents are not eligible for the 87A rebate at all. Purely salaried filers with no capital gains are unaffected—for them the ₹12 lakh ceiling / ₹60,000 rebate works in full.
Practical Example
Scenario: Priya, a Bengaluru salaried professional, has salary income of ₹9,50,000 and short-term capital gains of ₹1,50,000 from selling equity mutual funds in FY 2025-26. Total income = ₹11,00,000 (under ₹12 lakh), new regime, AY 2026-27.
Tax Computation:
- Tax on ₹9,50,000 salary slice (after new-regime slabs and standard deduction): reduced to nil by the Section 87A rebate. ✓ Rebate applies here.
- Tax on ₹1,50,000 STCG at 20% under Section 111A = ₹30,000, plus 4% health & education cess = ₹31,200. ✗ Rebate does not apply to this compartment.
Result: Even though Priya's total income is below ₹12 lakh, her final tax liability is ₹31,200, not zero. The rebate never touches the STCG.
Many taxpayers discover this only when the ITR utility computes a demand, or worse, when a Section 143(1)(a) intimation lands after filing.
What You Should Do Before Filing
- Separate your income by type before you file. Identify how much of your total is normal income (salary, business, interest, rent) versus 111A/112A capital gains. Only the normal slice benefits from the ₹60,000 rebate.
- Let the official ITR utility do the maths. The AY 2026-27 ITR utilities are programmed to apply this bar automatically. Do not override the computed figure to force a zero tax—the portal will reject an inconsistent filing.
- Use the ₹1,25,000 LTCG exemption first. For Section 112A gains, the first ₹1,25,000 each financial year is exempt. If you have multiple redemptions planned, stagger them across years to maximise this exemption.
- Reconcile capital gains with your Annual Information Statement (AIS). Every share and mutual-fund sale appears in your AIS—TDS, STT data, and fund house details are reported to the tax office. Under-reporting a gain the AIS already shows is the fastest route to a demand under Section 143(1)(a).
- Pay self-assessment tax (SAT) before filing. If your computation shows a balance due (e.g. ₹31,200 in the example), pay it before submitting the ITR to avoid interest under Sections 234B (interest on shortfall) and 234C (interest on delayed payment).
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I'm CA Harun Raaj, Visakhapatnam. If you are affected by capital gains in AY 2026-27 and unsure how the new rebate applies to your situation, reach out to discuss your filing strategy.
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See Also
Frequently Asked Questions
My total income is ₹8 lakh including ₹1 lakh short-term capital gains. Do I owe tax under the new regime in AY 2026-27?+
Yes. Your ₹7 lakh normal income is covered by the ₹60,000 Section 87A rebate, reducing tax to nil in that compartment. However, the ₹1 lakh STCG under Section 111A is taxed separately at 20% (plus 4% cess), yielding ₹20,000 + cess = ₹20,800. The rebate does not apply to capital gains, so your total tax is ₹20,800, not zero.
Does the Section 87A rebate block apply under the old tax regime as well?+
Yes. Under the old regime, the rebate (₹12,500 up to ₹5 lakh income) equally cannot be set off against Section 111A or 112A special-rate gains. The compartmentalisation rule applies to both regimes in AY 2026-27.
I have ₹50,000 long-term capital gains. Do I owe any tax under Section 112A in AY 2026-27?+
No. The first ₹1,25,000 of LTCG per financial year is exempt under Section 112A. Your ₹50,000 falls entirely within this exemption, so no tax is due on it. The Section 87A rebate bar does not matter if the gain itself is exempt.
Can I claim the Section 87A rebate on capital gains if I filed before the Finance Act 2025 amendment?+
The Finance Act 2025 amendment is effective from Assessment Year 2026-27 (Financial Year 2025-26). For AY 2025-26 and earlier, the position on rebate eligibility for capital gains was disputed; some tribunal benches allowed it, but those are not settled law. For AY 2026-27 onwards, the statute expressly bars the rebate on special-rate gains, and you cannot claim it.
I sold equity mutual funds that qualify for Section 111A. How do I compute the exact tax in the ITR?+
Identify the sale price, cost of acquisition, and sale date to establish holding period (short-term or long-term). Use Section 111A for STCG (20% tax) or Section 112A for LTCG (12.5% on gains above ₹1,25,000 exemption). The ITR-2 form has a schedule for capital gains; fill it with cost of acquisition, sale proceeds, and holding period. The utility will auto-compute tax at the special rate and block the rebate. Do not override this figure.
My Annual Information Statement (AIS) shows a mutual fund sale, but I forgot to report it in my ITR. What happens?+
The tax office matches ITR filings against AIS data. If the AIS shows a sale (via TDS, STT, or fund house reporting) and your ITR is silent or understates the gain, the tax office will issue a Section 143(1)(a) intimation with a demand. The best course is to immediately file a corrected or revised ITR under Section 139(5) citing the gain correctly, and pay the tax plus applicable interest under Sections 234B/234C.
Do debt mutual funds or property gains follow the same Section 87A rebate block?+
Debt funds and property are taxed under different sections—often at slab rates (if debt fund) or under Section 112 (property LTCG, 20% with indexation benefit). The specific ₹60,000 rebate block in Finance Act 2025 targets Sections 111A and 112A special rates on listed equities. Always confirm which section your gain falls under before assuming a tax rate.
What is the ITR filing deadline for AY 2026-27?+
For most individuals filing ITR-1 or ITR-2 (salaried, capital gains), the due date is **31 July 2026**. ITR-3 and ITR-4 non-audit filers get until **31 August 2026**. Filing after the due date but before 31 December 2026 is permitted under Section 139(4), but attracts a late-filing fee under Section 234F and loses the benefit of certain exemptions.
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