Budget 2026: Small taxpayers with capital gains miss out on Section 87A rebate; BCCI urges fix

Small taxpayers often fail to enjoy tax rebate under Section 87A of the Income Tax Act, 1961, when their total income includes short-term capital gains from equity mutual funds and shares, or capital gains from other assets.

Ahead of the Union Budget 2026, the Bombay Chamber of Commerce and Industry (BCCI) has urged the Finance Ministry to fix the above issue for the benefit of small taxpayers. They have suggested allowing the tax rebate on other incomes, even when the taxpayer's total income includes long-term or short-term capital gains from any capital asset.

In its Pre-Budget Memorandum 2026-27, the BCCI said, "...it is recommended that s.111A and s.112 of ITA be amended to incorporate provisions on lines of s.112A(6) of ITA to allow rebate on other income for small taxpayers."

The commerce and industry body further explained the issue in its memorandum to help understand why this change is required.

It noted that under the current regime for capital gains, the benefit of rebate under Section 87A is not available for LTCG from listed equity, equity-oriented funds, and units of business trust under Section 112A by virtue of Section 112A(6).

"Under the erstwhile as also new regime for capital gains, benefit of rebate u/s. 87A is not available for LTCG from listed equity, equity oriented funds and units of business trust u/s. 112A by virtue of s.112A(6) which provides that where the total income of an assessee includes any LTCG u/s. 112A, the rebate u/s. 87A shall be allowed from the income-tax on the total income as reduced by tax payable on such capital gains," BCCI said.

As per Section 112A(6), where the total income of an assessee includes any LTCG under Section 112A, the rebate under Section 87A is allowed from the income-tax on the total income as reduced by tax payable on such capital gains.

While the Section 87A rebate is not available on tax on LTCG from equity, the provision under Section 112A (6) allows the rebate on other incomes of the taxpayer. However, a similar benefit is not available under Section 112 and Section 111A.

Section 112 covers capital gains from any capital asset, whereas Section 111A deals with short-term capital gains from equity funds, shares and other equity-related instruments.

According to BCCI, an individual having other taxable income in the range of ₹ 2.5 lakh to ₹7 lakh is denied the benefit of the rebate on other income when there are capital gains under Section 112 or 111A. This further increases their tax burden.

"With the increase in tax rates u/s. 112 (from 10% to 12.5%) and u/s. 111A (from 15% to 20%), the difficulty for such taxpayers is perpetuated. They are denied rebate benefit which they are otherwise entitled on the normal income merely because they earn capital gains which is generally a one-off transaction," BCCI said.

"In terms of parity, since s.112A provides benefit of rebate on other income, s.111A and s.112 also ought to be amended to provide benefit of rebate on other income which will relieve them from hardship of paying higher tax on normal income merely because they also earn capital gains income," it added.