Section 87A rebate on LTCG, STCG: How Budget 2026 can fix the disparity for incomes below ₹12 lakh

In the Union Budget 2025, Finance Minister Nirmala Sitharaman increased the Section 87A rebate under the new tax regime to ₹60,000, which helped in exempting income up to ₹12 lakh from tax liability. However, this rebate doesn't apply to gains from equity shares and mutual funds even if an individual's total income is not more than ₹12 lakh.

According to the Association of Mutual Funds in India (AMFI), not allowing Section 87A rebate on equity gains leads to a disparity for salaried, middle-class taxpayers.

"This creates a disparity: a salaried middle-class individual earning below ₹12 lakh but also earning capital gains from equity-oriented mutual funds ends up paying tax at 12.5% or 20% on such gains, with no benefit of the ₹60,000 rebate. This undermines the stated goal of boosting savings and investments among the middle class," AMFI said in its recommendations to the government for the Union Budget 2026.

AMFI recalled that in Budget 2025 speech, the Finance Minister had said, “Democracy, Demography and Demand are the key support pillars in our journey towards Viksit Bharat. The middle class provides strength for India’s growth. This Government under the leadership of Prime Minister Modi has always believed in the admirable energy and ability of the middle class in nation building. The new structure will substantially reduce the taxes of the middle class and leave more money in their hands, boosting household consumption, savings and investment.”

However, the mutual fund body noted that the accompanying memorandum to Budget 2025 clarified that this rebate did not apply to income taxed at special rates, such as capital gains under sections 111A, 112, and 112A of the Income Tax Act, 1961.

Further, a new proviso was added to Section 87A stating that the rebate “shall not exceed the amount of income-tax payable as per the rates provided in subsection (1A) of section 115BAC”.

AMFI's fix

AMFI has suggested an amendment to the tax rules to allow the rebate on equity gains when an individual's total income is not more than ₹12 lakh.

"Amend Section 87A of the Act (section 156 of the Bill) to allow the rebate of ₹60,000 to be applied after computing tax on special rate incomes (such as capital gains), provided the total income (including such gains) does not exceed ₹12 lakh," AMFI recommended.

Explaining the rationale for this recommendation, AMFI said, "Mutual fund investments are increasingly popular among salaried individuals. Disallowing the rebate on capital gains discourages participation in capital markets, contrary to the government’s financial inclusion goals. Further, it discourages middle-class taxpayers who diversify their income through capital market investments. Allowing the rebate on capital gains ensures equitable treatment across income sources."