Rebate under section 87A against tax payable on long-term capital gains on sale of debt instruments allowed by ITAT Chandigarh.

Earlier article on related subject:

Provision relating to ‘tax rebate’ under sections 87 and 87A of Income-tax Act, 1961 are independent, self-contained and mandatory provisions.  

18 December, 2025 by CA Dev Kumar Kothari

In this article learned author has discussed mandatory nature of provisions and expressed view that rebate provision must prevail over other provision which restrict rebate in some situations. This view find support in a recent judgment of ITAT. Author is of view that it can be for any LTCG other than  those specifically prohibited like some Equity instrument.

Recent judgment of ITAT:

Sh. Gurminder Singh Versus ITO Ward-2, Ambala - 2025 (12) TMI 861 - ITAT CHANDIGARH

In this case assessee derived income from different sources which fell in different nature.

One of source and nature  was  Long Term Capital Gains  computed with application of cost inflation indexation. This  arose on transfer of debt instruments which were held for long-term therefore cost was increased by applying cost inflation index (CII).

Assessee claimed tax rebate including  against tax payable on such LTCG which arose on transfer of debt instruments.

Though exact nature of such instruments is not mentioned in the judgment and honourable Tribunal has described it as per computation portion taken from case records as follows:

This can be on transfer of instruments like debentures, bonds, saving certificates etc.

Tax rebate against amount of tax payable in respect of the same was denied  by CPC in intimation issued u.s. 143.1. On appeal CIT(A) also confirmed denial of rebate. Therefore, assessee preferred appeal before ITAT.

Provisions restricting rebate:

Tribunal considered provisions of S. 112A . In particular sub-sections (1) and (6) which imposes restrictions on tax rebate u.s. 87A.

Para of the order of ITAT is reproduced below with highlights added by author:

 “4. We find that sub-section (6) of s. 112A prohibit rebate u/s. 87A on capital gains as referred to in sub-section (1) of s. 112A. The clause (ii) of s. 112A(1)refer 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.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. The computation of tax payable would show that the assessee has computed tax of Rs. 23,804/- (at the rate of 20% on Debt LTCG of Rs. 1,19,020/-). 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 rebate threshold limit of Rs. 25,000/-. 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. “

Unquote:

Relevant portion of s.112A referred by Tribunal is reproduced below:

[Tax on long-term capital gains in certain cases

112A. (1) Notwithstanding anything contained in section 112, the tax payable by an assessee on his total income shall be determined in accordance with the provisions of sub-section (2), if-

1. the total income includes any income chargeable under the head “Capital gains”;

xxx

(ii) the capital gains arise from the 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;

xxxx

 (6) Where the total income of an assessee includes any long-term capital gains referred to in sub-section (1), the rebate under section 87A shall be allowed from the income-tax on the total income as reduced by tax payable on such capital gains.

Therefore, on conjoint reading of provisions of sections 87A,112 and 112A honourable Tribunal allowed rebate against tax payable on long-term capital gain on debt instruments.

Curtailment of Rebate vide section 112A:

We find that in provisions of rebate there is no such restriction provided. Rebate is allowable with reference to the amount of tax payable on ‘total income’.

Rebate is allowed to small tax payers as an incentive and to reduce tax burden.

All type of long-term capital gains are included in ‘total income’  and Tax on all type of long-term capital gains are included in tax payable on total income.

Language used in S.87A is mandatory.

Section 112 and 112A are to provide ‘special rate of tax’.  Tax computed at such Special rates are also ‘ tax payable’ on total income.  Heading of S.87A is “Tax on long-term capital gains in certain cases”.

The purpose and scope of S.112A should therefore be only to prescribe rate of tax and it should not restrict rebate otherwise allowable u.s. 87A. Otherwise an incentive given by one provision is taken away by another provision and this only makes law complex. Such complexity is not intended for small tax payers.

Therefore,  considering the purpose  and language of S.87A, a possible view is that provisions of tax rebate u.s. 87A must  be applied liberally and  tax rebate can be allowed against tax payable on total income, irrespective of special rate of tax.