In a move that could ease the tax burden for millions of small and medium investors, the Income Tax Appellate Tribunal (ITAT) has ruled that the Section 87A rebate will now apply to Long-Term capital Gains (LTCG). This landmark judgment by the chennai bench is expected to bring significant relief to taxpayers who earn income from investments like equities, mutual funds, and real estate. Here are the key highlights.
1. What Is Section 87A Rebate?
Section 87A allows individuals with lower annual incomes to reduce their tax liability through a rebate:
- New Regime: Up to ₹7 lakh annual income – rebate of up to ₹25,000.
- Old Regime: Up to ₹5 lakh annual income – rebate of up to ₹12,500.
Until now, this rebate excluded LTCG, as it was taxed at special rates.
2. Landmark Change – LTCG Now Eligible
Previously, LTCG was kept out of the Section 87A rebate’s ambit. The ITAT ruling now ensures that if total income (including LTCG) falls under the rebate threshold, taxpayers can claim the rebate and potentially pay zero tax.
3. The Case That Sparked the Change
The case involved Mr. Venkataraman from tamil Nadu, who included LTCG in his total income of ₹4.97 lakh and claimed the rebate. Initially rejected by the Income Tax Department and the Commissioner of Income Tax (Appeals), the ITAT overturned these decisions, ruling in favor of the taxpayer on August 20, 2025.
4. Understanding STCG vs. LTCG
- Short-Term capital Gains (STCG):
- Equity: Less than 12 months.
- Real estate, debt funds, gold: Less than 36 months.
- Taxed as per slab rates or 15% for equity (before July 2024).
- Long-Term capital Gains (LTCG):
- Equity: More than 12 months.
- Real estate, debt funds, gold: More than 24 months.
- Tax rate: 12.5% on gains exceeding ₹1.25 lakh plus cess and surcharge.
5. Relief for Small and Medium Investors
The ruling particularly benefits investors with total income under ₹5 lakh (old regime) or ₹7 lakh (new regime), including LTCG. Such taxpayers can now avail full rebate and avoid tax completely, making long-term investing more rewarding.
6. Boost for Wealth Creation
By extending the rebate to LTCG, the ITAT ruling encourages more people to explore equities, real estate, and mutual funds for wealth creation. Reduced tax liability means higher post-tax returns, motivating long-term financial planning.
7. What’s Next – Will the Ruling Hold?
Although the Income Tax Department may challenge the ruling, it provides immediate relief to taxpayers and sets a strong precedent for future cases. If upheld, it will permanently extend Section 87A benefits to LTCG earners.
Bottom Line
The ITAT ruling marks a major win for taxpayers, promoting fair treatment of long-term investors and reducing tax burdens for small earners. If you’re a low-income investor with LTCG, this decision could mean significant savings.
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