Budget 2026: Fixing Section 87A Rebate Gap Could Boost Relief for Small Taxpayers with Capital Gains

“Budget 2026: Fixing Section 87A Rebate Gap Could Boost Relief for Small Taxpayers with Capital Gains”

“BCCI urges government to extend rebate to equity investors and small taxpayers”

“Closing loophole may improve fairness, savings, and investor confidence”

By Our Business Reporter

New Delhi: January 03, 2026:

As India heads into Union Budget 2026, one of the most debated issues in personal taxation is the Section 87A rebate gap. While salaried taxpayers earning up to ₹12.75 lakh currently enjoy zero tax liability under the new regime, small taxpayers with capital gains from shares or mutual funds often miss out on this benefit.

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The Bombay Chamber of Commerce and Industry (BCCI) has urged the government to fix a gap in Section 87A of the Income Tax Act. Currently, small taxpayers with capital gains from shares or mutual funds often miss out on the rebate, even if their total income is below the threshold. Addressing this anomaly in Budget 2026 would make tax relief more inclusive, boost investor confidence, and support middle-class taxpayers.

The Bombay Chamber of Commerce and Industry (BCCI) has urged the Finance Ministry to fix this anomaly, arguing that it unfairly penalises small investors and discourages participation in capital markets.

What Is Section 87A Rebate?

• Section 87A provides tax relief to resident individuals with income below a certain threshold.
• For FY 2025–26, taxpayers under the new regime can claim a rebate of up to ₹60,000 if their income is below ₹12 lakh.
• However, the rebate is not available for incomes taxed at special rates, such as short-term capital gains (Section 111A) and long-term capital gains (Section 112).

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This means that even if a taxpayer’s total income is below ₹12 lakh, the presence of capital gains can disqualify them from claiming the rebate.

The Problem for Small Taxpayers

• Equity investors penalised: Small taxpayers who invest in shares or equity mutual funds often face short-term capital gains taxed at 15% or long-term gains taxed at 10%.
• Rebate denied: Because these gains are taxed at special rates, taxpayers lose eligibility for Section 87A rebate.
• Unfair burden: A salaried person earning ₹12 lakh pays zero tax, but an investor earning ₹6 lakh salary + ₹1 lakh capital gains may end up paying tax.

This creates a disparity between salaried taxpayers and small investors, discouraging savings and investment.

BCCI’s Recommendation

• Amend Sections 111A and 112 to align with Section 112A (6), which allows certain capital gains to be considered for rebate eligibility.
• Ensure that small taxpayers with modest capital gains can still claim the rebate.
• Promote fairness and inclusivity in tax policy.

Comparison Table: Current vs Proposed Scenario

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How This Helps Taxpayers

• Fairness: Aligns treatment of salaried taxpayers and investors.
• Encourages investment: More people may invest in equity markets if tax rules are fair.
• Boosts savings: Small taxpayers retain more disposable income.
• Supports middle class: Reduces tax burden on households balancing salary and investment income.

Risks and Challenges

• Revenue impact: Extending rebate to capital gains may reduce government tax collections.
• Policy complexity: Aligning multiple sections of the Income Tax Act requires careful drafting.
• Potential misuse: High-income taxpayers may attempt to structure income to exploit rebates.

Wider Budget 2026 Context

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• Budget 2025 relief: Salaried taxpayers earning up to ₹12.75 lakh pay no tax.
• New Income Tax Act 2025: Will replace the 1961 Act from April 1, 2026.
• Expectations: Middle-class taxpayers hope for rationalised slabs and clarity on capital gains taxation.

Conclusion

Fixing the Section 87A rebate gap in Budget 2026 would be a major step towards fairness in India’s tax system. It would ensure that small taxpayers with modest capital gains are not penalised compared to salaried individuals.

By extending rebate eligibility, the government can boost investor confidence, encourage savings, and support the middle class, while balancing fiscal needs.

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