The Income Tax Appellate Tribunal (ITAT), Chandigarh, has provided significant relief to taxpayers by allowing the benefit of rebate under Section 87A of the Income-tax Act, 1961, on long-term capital gains (LTCG) arising from debt mutual funds for earlier assessment years. In its order dated 10 December 2025, the Tribunal set aside a tax demand of ₹25,710 raised by the Income Tax Department and directed recomputation of tax liability by granting the full rebate.
In the case (ITA No. 887/CHANDI/2025), the taxpayer had claimed rebate under Section 87A on his total tax liability, which included LTCG from debt mutual funds taxable at a special rate under Section 112. While processing the return, the Centralised Processing Centre (CPC) restricted the rebate only to income taxable at normal rates and excluded tax on LTCG, resulting in a reduced rebate and a consequential tax demand.
The Tribunal examined the scope of Section 112A(6), which restricts the availability of Section 87A rebate in respect of certain capital gains. It was observed that the restriction applies only to long-term capital gains arising from transfer of listed equity shares, units of equity-oriented mutual funds, or business trusts, as specified under Section 112A(1). Long-term capital gains from debt mutual funds, however, are governed by Section 112 and are not covered by this restriction.
Accordingly, the Tribunal held that there is no statutory bar on allowing the Section 87A rebate against tax payable on LTCG from debt mutual funds. Since the total tax liability in the case exceeded the rebate threshold, the taxpayer was found eligible for the full rebate of ₹25,000. The appeal was allowed, and the CPC was directed to recompute the tax payable.
Implications for Taxpayers
The ruling clarifies that, for assessment years prior to AY 2025-26, taxpayers earning long-term capital gains from debt mutual funds or other assets taxable under Section 112 are eligible to claim rebate under Section 87A. Taxpayers who were earlier denied this benefit may seek relief through rectification or appellate proceedings, as applicable.
It is, however, clarified that from AY 2025-26 onwards, the Finance Act, 2025 has amended the law to specifically exclude incomes taxable at special rates from the scope of Section 87A rebate under the new tax regime. As such, the benefit upheld in this decision will not apply prospectively.
This order of Income Tax Appellate Tribunal, Chandigarh provides important guidance on the interpretation of Section 87A in relation to debt mutual fund investments for past years and reinforces the principle that statutory restrictions must be applied strictly in accordance with their wording.
Source from: https://economictimes.indiatimes.com/wealth/tax/section-87a-rebate-on-capital-gains-from-debt-mutual-fund-itat-chandigarh-gives-relief-to-taxpayer-and-cancels-rs-25710-tax-demand-notice-from-income-tax-dept/articleshow/126372968.cms
