Budget 2026: On paper, Section 87A looks generous. Headlines talk about “zero tax” up to certain income limits and expanded rebates under the new tax regime. But for taxpayers who earn even modest capital gains, this rebate often turns out to be irrelevant or misleading.
This is exactly why the Bombay Chamber of Commerce and Industry (BCCI) has flagged the issue ahead of Budget 2026. Their concern isn’t theoretical. It reflects what many taxpayers discovered the hard way while filing returns: Section 87A does not meaningfully reduce tax on capital gains, even when total income appears to fall within the rebate limit.
The Core Problem: Capital Gains Are Treated Separately
Under current tax rules, income taxed at special rates such as short-term and long-term capital gains – is kept outside the rebate calculation under Section 87A.
What this means in practice:
- The rebate applies mainly to normal income (salary, business income).
- Capital gains are taxed independently at fixed rates.
- The rebate cannot be used to wipe out or significantly reduce capital gains tax.
So a taxpayer may technically qualify for Section 87A based on total income, yet still end up paying tax sometimes a substantial amount because capital gains remain untouched.
This is where expectations break.
Why This Feels Unfair to Small Investors
Many taxpayers affected are not high-net-worth individuals. They are:
- Salaried employees who sold mutual funds
- First-time equity investors booking small profits
- People selling inherited property or a plot after many years
They don’t see themselves as “investors,” yet the tax system treats their income as special-rate income and excludes it from rebate relief.
BCCI’s objection is simple: a small, one-time capital gain can cancel out the practical benefit of the rebate entirely, even when the person’s overall income is modest.
Why So Many Filers Get Rejected, Flagged, or Delayed
This issue isn’t just about law it’s also about how returns are processed on the ground.
1. E-Filing Portal Confusion
The income-tax portal does not always clearly explain why the rebate isn’t applied when capital gains are present. Many filers assume it’s a technical glitch, not a rule.
They either:
- Claim the rebate incorrectly, or
- Don’t understand why tax is still payable
Both lead to follow-up notices later.
2. Manual Corrections Invite Scrutiny
When taxpayers manually override calculations or claim rebate incorrectly on gains, returns often get flagged for verification. This causes:
- Processing delays
- Demand notices
- Stressful correction cycles months later
3. Conflicting Advice and Past Rulings
Different interpretations in earlier years, including tribunal rulings, gave taxpayers hope that rebate might apply to some capital gains. Later clarifications reversed that position, but by then many people had already filed based on outdated advice.
The result: legally correct today, but practically messy.
High-Chance vs Low-Chance Taxpayers
High-Chance (Rebate Actually Helps)
- Pure salaried taxpayers with no capital gains
- Small business owners with only normal income
- People well below rebate limits with clean income structure
For them, Section 87A still works as advertised.
Low-Chance (Most Capital Gains Earners)
- Anyone with short-term or long-term equity gains
- Mutual fund investors who redeemed units
- Property sellers, even one-time sellers
- Taxpayers near income thresholds with mixed income
For this group, the rebate does not reduce the most painful part of their tax bill.
The False Hope Problem
The biggest issue isn’t that Section 87A exists it’s how it’s perceived.
Budget announcements and summaries talk about “zero tax” up to certain limits, but they don’t emphasize that capital gains are excluded. Taxpayers only learn this after:
- Filing the return, or
- Receiving a tax payable message they didn’t expect
By then, planning options are gone.
Is Section 87A Worth Your Time If You Have Capital Gains?
Short answer: temper your expectations.
- Don’t plan investments assuming the rebate will cover gains.
- Don’t assume low total income means zero tax.
- Don’t rely on auto-calculation understand what portion of income is excluded.
If capital gains are a regular part of your income, Section 87A is not a meaningful relief tool. At best, it slightly reduces tax on salary income while leaving gains fully taxable.
What Budget 2026 Needs to Fix
BCCI’s suggestion is practical:
Either allow the rebate to apply more rationally when total income is low, or redesign how special-rate income interacts with basic relief.
Until then, Section 87A remains:
- Helpful for non-investors
- Confusing for small investors
- Disappointing for anyone with capital gains
Bottom Line
Section 87A is not broken but it is narrow, poorly explained, and misunderstood.
If you earn capital gains, don’t waste time expecting this rebate to solve your tax problem. Focus instead on:
- Accurate reporting
- Understanding applicable rates
- Avoiding incorrect claims that lead to notices
Hope doesn’t reduce tax. Clear rules do and right now, Section 87A isn’t written for capital-gains taxpayers, no matter how small their gains are.