Summary: Capital gain is defined as the increase in an asset’s value over its original purchase price, realized upon its sale. This concept was first introduced in India’s tax legislation in 1947, discontinued briefly, and then re-introduced in 1957. Sections 45 to 55A of the Income Tax Act, 1961, govern capital gains taxation, with the basic structure maintained in the proposed Income Tax Bill, 2025. Over the years, significant amendments have shaped capital gains tax, including the introduction of special rates for long-term (LTCG) and short-term capital gains (STCG) under Sections 112, 111A, and 112A, alongside the Securities Transaction Tax (STT). Notably, LTCG on listed securities was exempted under Section 10(38) until 2018, then re-introduced with a 10% tax for gains exceeding INR 100,000. Subsequent amendments in 2024 increased the LTCG rate to 12.5% for gains above INR 125,000, modified holding periods for asset classification, and removed indexation benefits for most assets, while uniformly taxing LTCG at 12.5%. Section 87A, introduced in 2013, provides a tax rebate for resident individuals, with eligibility and rebate amounts varying based on total income and the chosen tax regime (Old or New). A recent controversy arose regarding the inclusion of special rate incomes for Section 87A rebate calculation, with a Bombay High Court ruling indicating it as a debatable issue. The Finance Act, 2025, has clarified that Section 87A rebate will not apply to special rate incomes, but the question of including such incomes for determining overall eligibility for the rebate remains open for interpretation.
Meaning
Capital gain can be said to be increase in the value of an asset relative to the price that was originally paid for it.
It can also be an economic concept defined as the profit earned on the sale of an asset which has increased in value over the holding period. An asset may include tangible property or intangible property such as shares.
Legislative History
The capital gain for the first time was introduced in the year 1947 through insertion of section 12B to the Income Tax Act, 1922. However this levy was short lived and it was discontinued through Finance Act, 1949. Capital gains taxation was re- introduced w.e.f 01/04/1957 in terms of Finance No. (3) Act 1956. The scope of capital gains tax was widened through various amendments mainly after introduction of Income Tax Act, 1961. Present sections 45 to 55A relate to capital gains taxation. The basic structure of capital gains has been retained in the Income Tax Bill, 2025 covering in clauses 67 to 91. There is no basis change except the provisions has been restructured.
In this right up I will confine myself only to certain provisions of common interest relating to calculation of capital gains tax which are important and also controversy regarding claim of rebate u/s 87A, where the assesse incurs capital gains tax liability in addition to normal income under other heads.
In the recent years various amendments have been made in the chapter of capital gains tax, Chapter XII wherein certain incomes have been made taxable at special rates and Section 87A wherein rebate/relief can be claimed subject to certain conditions.
1) Tax on long term capital gains was levied at a special rate U/S 112 of the Income Tax Act, 1961 w.e.f. 01/04/1993.
2) Substantial changes were made in taxation of STCG tax and LTCG tax by way of introduction of section 111A, Section 112A and Section 10(38) of the Income Tax Act and securities transaction tax (STT) was also introduced in relation to purchase and sale of listed securities and mutual funds.
3) LTCG tax was exempted U/S 10(38) of Income Tax Act in respect of listed securities and mutual funds through Finance No. 2 Act 2004 w.e.f. 01/04/2005. Section 10(38) was operative for transactions made upto 31/03/2018.
4) The LTCG tax on listed securities etc. was reintroduced w.e.f. 01/04/2019 (A/Y 2019-20) @ 10% U/S 112A if the gains exceeded Rs. 1,00,000/- in a financial year.
5) A grandfathering formula was introduced for calculation of LTCG by adjusting the cost of acquisition and fair market value as on 31/01/2018 through section 55(2)(ac).
6) The rate of LTCG was enhanced to 12.5% w.e.f. 23/07/2024 in excess of Rs. 1,25,000/- in a financial year.
7) Section 87A was introduced by the Finance Act, 2013 w.e.f. 01.04.2014 to allow rebate of income tax in case of certain tax payers. Section 87A is reproduced as under.
Section 87A
Section 87A was introduced to ease the financial burden on low income earners, which offers a rebate to certain specified assesses with a total taxable income of upto Rs. 5 Lakhs under the Old Regime and Rs. 7 Lakhs under the New Tax Regime (upto Assessment Year 2025-26 and Rs. 12 Lakhs under the New Tax Regime from Assessment Year 2026-27)
Section 87A provides for tax rebate of an amount equal to 100% of income tax provided that the total income does not exceed Rs. 7 Lakhs subject to maximum of Rs. 25,000/- upto Assessment Year 2025-26.
New Tax Regime was introduced by introduction of Section 115BAC by the Finance Act, 2020 w.e.f. 01.04.2021(Assessment Year 2021-22), which provides an option to certain taxpayers to discharge his tax liability at lower rates of tax subject to fulfillment of certain conditions as provided in sub section (2) of Section 115BAC.
Controversy in Calculating the Rebate Amount u/s 87A
Income liable to tax at special rates was Included in the total income to determine eligibility and allowability of tax rebates on such incomes. No distinction was made for the purposes of allowing the tax rate U/S 87A. On July 5th 2024 the department modified the ITR filing utility to the effect that special rate incomes were ignored for eligibility and calculating the rebate amount u/s 87A. Chamber of Tax Consultants filed a PIL before the Bombay High Court against the arbitrary modification of ITR Utility.
Bombay High Court directed the department to modify the utility, allowing the tax payers to claim the relief with the following observation.
“42. In our opinion, whether a rebate under section 87A can be granted only from the tax arrived at under section 115BAC or also from the tax computed under other provisions of Chapter XII is a highly debatable and arguable issue. This would require interpreting various provisions of Chapter XII and Section 87A of the Act. In our view, after hearing the arguments of the learned senior counsel and the learned ASG, we cannot say that the provisions of the Act are so crystal clear as to arrive at a definite conclusion that a rebate under section 87A cannot be granted from the tax computed under other provisions of Chapter XII. Though the learned senior counsel for the petitioners and the learned ASG argued the matter for four hours each, we were unconvinced that either of the contentions was not even debatable or would admit to only one conclusion. In such a case, in our view, certainly, the respondents cannot restrain or prohibit an assesse from claiming section 87A by modifying their utility by which an assesse is forbidden at the threshold itself from making such a claim. Certainly, such a claim whether eligible or not can be examined in the proceedings under section 143(1), section 143(3), etc. Merely because many returns are required to be processed and only a few of them are selected for scrutiny, it cannot be grounds to prohibit an assessee from making a debatable and arguable claim. In any event, considering the mandates of Articles 265 and 300A, ends, howsoever laudable, cannot justify means.”
From the above observation of the High Court it is seen that the court did not decide the core issue holding that it was a debatable issue, which could be examined in the assessment proceedings. However inspite of directions of the High Court, the department never allowed the claim u/s 87A on special rate incomes while processing the returns or in rectification proceedings.
The other relevant points to remember as applicable for A.Y. 2025-26 are as under:-
i) The rebate u/s 87A is allowable only in case of resident
ii) After amendments through Finance (No. 2) Act, 2024 the date of transfer of the asset is relevant because, if the date of transfer is e.f. 23.07.2024, it will impact.
a) The period of holding of capital assets
b) Availability of indexation
c) Applicable tax rates
iii) The Finance (No. 2) Act, 2024 has made the following amendments, which are worth considering.
a) Section 2(42A) has been amended to prescribe only two holding periods for determining the nature of capital assets for classification into Long Term and Short Term Capital Assets. The 36 months holding period has been substituted with 24 months for all provisions except listed securities, units of unit trust of India, units of an equity oriented fund and zero coupon bonds where the holding period shall be 12 months.
b) The second proviso to Section 48 has been amended to provide that no indexation benefit shall be available in respect of the long-term capital assets with an exception in relation to land and building where an option has been provided to pay the tax @ 20% after availing the indexation.
c) Section 112 has been amended to provide a uniform tax rate of 12.5% on long-term capital gains for all categories of tax payers. However, resident individuals and resident HUFs can choose between the old and the new law when computing long term capital gains tax on the transfer of land or buildings acquired on or before 22/07/2024.
d) Section 112A has been amended to increase the tax rate on long-term capital gains from 10% to 12.5%. Further, the threshold limit up to which no tax is levied has been increased from Rs. 1,00,000/- to Rs. 1,25,000/-.
e) Section 111A has been amended to increase the tax rate on short-term capital gains from 15% to 20%.
Now coming to the amendments made by Finance Act 2025, effective from A.Y. 2026-27.
a) Section 87A has been amended to provide higher rebate of Rs,. 60,000/- to resident individuals taxable under the new tax regime u/s 115BAC (1A).
b) The total income threshold for rebate eligibility has been increased from 7 Lakhs to Rs. 12 Lakhs.
c) Marginal tax relief has also been provided, which will be applicable from12 Lakhs to Rs. 12.75 Lakhs.
d) Slab rates of tax has been restructured enhancing the exemption limit to4,00,000/- and the highest rate of tax has been made applicable on income above Rs. 24 Lakhs.
e) A Second proviso has been inserted to Section 87A to provide that the rebate cannot exceed the tax payable as per the slab rates under the new tax regime. This insertion of proviso will result in denying the tax rebate u/s 87A on incomes taxable at special rates.
Conclusion
It is important to note that the amendment through Finance Act, 2025 has settled one part of the dispute that the rebate u/s 87A will not be available against incomes taxable at special rates. However the issue of inclusion of special rate income for determining the eligibility of Rs. 12 Lakhs/Rs. 7 Lakhs remains open to judicial scrutiny. A final ruling or further amendment of the provisions will only settle the issue of total income for eligibility to claim the rebate u/s 87A.
Author Bio
I have salary income of 5 lakh and interest income of 3 lakh Total income 8 lakh
Now I do not have to pay tax for income upto 8 lakh But Banks will deduct tax on Interest. My query is can I submit form 15 G to Bank