Section 87A rebate on capital gains from debt mutual fund:
ITAT Chandigarh gives relief to taxpayer and cancels Rs 25,710 tax demand notice from Income Tax Dept
Jan 7, 2026
Synopsis
The Income Tax Appellate Tribunal in Chandigarh has ruled that taxpayers can claim the Section 87A tax rebate on long-term capital gains from debt mutual funds. This decision overturns a tax demand of Rs 25,710 for a taxpayer. The tribunal clarified that the restriction on this rebate applies only to equity-oriented gains. Read more.
The Section 87A tax rebate has sparked quite a debate, especially among those with long term capital gains (LTCG) from equity or debt mutual funds. The Budget 2025 clearly stated that the Section 87A tax rebate is off the table for LTCG on equity mutual funds, but it didn’t apply this in retrospective cases. So, it’s now up to the courts and tribunals to decide.
The explanatory memorandum to Budget 2025 said: "The provisions of sub-section (1A) of section 115BAC are subject to the other provisions of Chapter XII i.e. determination of tax in certain special cases. Hence, proviso to section 87A clearly provides that tax on incomes chargeable at special rates (for e.g.: capital gains u/s 111A, 112 etc.) as specified under various provisions of Chapter XII, are not included while determining the rebate of income-tax under the first proviso to section 87A."
This case mentioned in this article involves the denial of the Section 87A tax rebate on LTCG from debt mutual funds from debt mutual funds and how a taxpayer won the case. In this particular case (no. ITA No.887/CHANDI/2025), the ITAT Chandigarh ruled on December 10, 2025 that the Section 87A tax rebate claim on LTCG from debt mutual funds was valid.
Chartered Accountant Gopal Bohra, Partner - Direct Tax, N. A. Shah Associates LLP, said that in this case, the taxpayer has claimed rebate under Section 87A on total tax liability including long term capital gain from debt mutual fund chargeable to tax at a special rate of 20%.
Bohra says that, Centralised Processing Centre however only allowed rebate under Section 87A only on tax liability computed on income chargeable to tax at normal rates and excluded tax on income chargeable at special rate.
Bohra says: “This resulted in reduction of rebate eligibility. The tribunal has rightly allowed the rebate u/s 87A on tax on long term capital gain from debt mutual funds as restriction contained in section 112A(6) applies only to Long Term Capital Gain from listed equity shares, equity-oriented mutual funds and business trusts.”
A little background
Mr. Singh from Ambala had filed this case in ITAT Chandigarh as the CIT (Appeals) had rejected his Section 87A tax rebate claim on LTCG from debt mutual funds. His income as filed in the income tax return (ITR) are as follows:
His tax came out to be Rs 27,586 based on the incomes mentioned above, so he claimed a Section 87A tax rebate of Rs 25,000, leaving him with a net tax payment of Rs 2,586. However, the income tax department limited the Section 87A tax rebate to Rs 3,119, which raised the tax due after the rebate to Rs 24,467. Following this, he received a tax demand notice for Rs 25,710. Feeling aggrieved, he first filed a case with CIT (A) and then took it to the ITAT Chandigarh.
The CIT(A) determined that according to the rules in Section 112A(6), the 87A tax rebate would be applied to Income Tax on total income after deducting the tax owed on capital gains as outlined in sub-Section (1) of Section 112A. Therefore, this rebate wouldn’t apply to the tax calculated on Long-Term Capital Gains. Feeling wronged, Mr. Singh appealed to the ITAT Chandigarh.
ITAT Chandigarh analysis and discussion
Manoj Kumar Aggarwal, accountant member of ITAT Chandigarh, said in the judgement that they find that sub-Section (6) of Section 112A prohibits rebate under Section 87A on capital gains as referred to in sub-Section (1) of Section 112A. The clause (ii) of Section 112A(1) refers to capital gains arising from transfer of a Long-Term Capital Asset being an equity share in a company or a unit of an equity oriented fund or a unit of a business trust.
ITAT Chandigarh said: “This clause thus refers only to Long-Term Equity Capital Gains and not to Long-Term Debt Capital Gains. The debt Long Term capital gains are governed by the provisions of s.112 and as such there is no such bar to claim rebate u/s 87A on this income.”
ITAT Chandigarh said the computation of tax payable would show that the assessee (Mr. Singh) has calculated a tax of Rs 23,804 (at the rate of 20% on Debt LTCG of Rs 1,19,020).
ITAT Chandigarh said that the tax on other normal income (excluding equity LTCG) has been computed at Rs 3,456 (i.e., Rs.337 + Rs.3,119). Both these items well exceed the rebate threshold limit of Rs.25,000.
ITAT Chandigarh judgement: “This being so, the assessee would be eligible to claim full rebate of Rs 25,000. We order so. The CPC is directed to re-compute the tax payable by the assessee. The appeal stand allowed. Order pronounced on 10th December, 2025.”
Sachin Vasudeva, Senior Partner, SCV & Co. LLP, says that the restriction imposed by section 112A(6) applies only to cases of capital gains covered in sub-section (1) of that section which are capital gains on transfer of an equity share or unit of an equity oriented mutual fund.
Vasudeva says: “In the present case, the taxpayer had taxable capital gains arising from sale of units of a debt mutual fund which are not governed by section 112(A)(6). Accordingly, the ITAT rightly allowed the appeal of the taxpayer.”
Can you claim Section 87A rebate on LTCG on debt MFs for periods older than FY 2024-25?
Vasudeva says that this ITAT ruling clarifies that any taxpayer earning Long term capital gains from debt mutual funds or bonds which are taxable under Sections 112 and not 112A are eligible for rebate under section 87A.
Vasudeva says: “As the language of section 112A(6) has remained unchanged in preceding years, the taxpayers who were denied the benefit of rebate under section 87A by CPC or under assessment can seek the relief by way of rectification or appeal as the case may be.”
According to Vasudeva, “…this ITAT ruling will definitely help in getting the relief especially where the benefit of rebate is mechanically denied on all Long-term capital gains.
According to Bohra, the embargo on section 87A tax rebate does not extend to long-term capital gains on debt instruments or short-term capital gain from equity shares / equity oriented mutual funds which are chargeable to tax at special rate as specified under Sections 112 and 111A respectively.
Bohra says: “However, this position will not be relevant for AY 2025-26 onward as Finance Act 2025 has specifically excluded special rate incomes from the rebate calculation for the new tax regime.”
According to Bohra from N.A Shah Associates LLP, while for the present year (AY 2025-26), Section 87A rebate can’t be claimed on LTCG on equity, debt or any special rate income but for past periods no such restrictions existed. However the taxpayers’ claim might get rejected and he/she may have to contest such Section 87A tax rebate on LTCG on debt and STCG on equity MF claims in tribunals and court.
[The Economic Times]
