Section 87A rebate and equity capital gains

Section 87A of the Income Tax Act allows a rebate that effectively zeroes out income tax for resident individuals whose total income falls below a specified threshold. For a long time this was a simple "lower-income relief" lever. Recent amendments and contested CBDT positions on whether the rebate applies to equity long-term capital gains taxed under Section 112A have made the rule materially more relevant for retirees and SWP-running investors.

What 87A does

Section 87A provides a rebate equal to the smaller of the income tax payable or a fixed cap. Under the new tax regime (the default since FY 2023-24), the rebate is up to ₹25,000 for total income up to ₹7,00,000. Under the old tax regime, the rebate is up to ₹12,500 for total income up to ₹5,00,000. Cross the threshold by even ₹1 and the rebate disappears — there is no taper.

The rebate is computed on the tax payable before cess. It is not a deduction from income; it is a credit against the computed tax.

The Section 112A wrinkle

Equity LTCG above the ₹1.25 lakh annual exemption is taxed at 12.5% under Section 112A. Whether the 87A rebate can be applied against this 112A liability has been disputed. CBDT has at times taken the position that the rebate is not available against the 112A component, and at other times the income-tax utility software has allowed it. Tax tribunals have ruled in favour of taxpayers in several cases.

As of the most recent clarifications, the working position for most filers is: rebate available against ordinary slab-taxed income, contested against 112A LTCG. If your filing involves meaningful 112A LTCG and you are near the rebate threshold, model both scenarios.

A worked example

A retiree in the new tax regime has:

• Slab income (pension, FD interest): ₹4,50,000.
• Equity LTCG realised during the year: ₹3,50,000 (above the ₹1.25 lakh exemption: ₹2,25,000 taxable).
• Total income for rebate test: ₹4,50,000 + ₹2,25,000 = ₹6,75,000.

Total income is below the ₹7 lakh threshold, so 87A becomes relevant. The slab portion has zero tax (below the basic exemption under the new regime structure). The 112A portion attracts ₹2,25,000 × 12.5% = ₹28,125 in tax. If 87A applies, the ₹25,000 rebate cancels most of this; the residual ₹3,125 plus cess is payable. If 87A does not apply against 112A, the full ₹28,125 plus cess is payable.

Why this matters for SWP runners

Investors structuring retirement income through a Systematic Withdrawal Plan typically have low slab income (pension only) and a stream of equity LTCG from each monthly redemption. The 87A interaction is the difference between paying small tax and paying meaningful tax on the LTCG. Position the SWP so that the resulting LTCG stays within the ₹1.25 lakh annual exemption to the extent possible, and only spill into rebate-relevant territory when necessary.

Practical planning levers

• Sequence redemptions across financial years to keep annual LTCG below ₹1.25 lakh.
• Harvest in low-LTCG years when the rebate firmly applies and total income stays below the threshold.
• Mind the cliff: total income of ₹7,00,001 in the new regime loses the entire ₹25,000 rebate. Even small year-end IDCW payments can tip you over.
• Defer non-essential redemptions into the next financial year if year-end income is already near the threshold.

For NRIs

Section 87A applies only to resident individuals. NRIs cannot claim the rebate regardless of total income. Plan accordingly if your residency status changes during the year.

Filing checkpoint

When you file ITR-2, the rebate is auto-computed by the utility once it has all your income heads. Always cross-check by hand for the year you have meaningful 112A LTCG — utility behaviour has lagged tribunal rulings in some past cycles. If the utility denies the rebate against 112A and you believe you qualify, computing manually and filing under protest is an option that many tax practitioners take.