ITAT Ruling Extends Section 87A Rebate to Long-Term Capital Gains, Offering Huge Relief to Taxpayers

In a landmark decision that could benefit millions of small and medium investors, the Income Tax Appellate Tribunal (ITAT) has ruled that the rebate under Section 87A of the Income Tax Act will also be applicable on Long-Term Capital Gains (LTCG). Until now, this benefit was restricted only to Short-Term Capital Gains (STCG), leaving long-term investors outside the ambit of the rebate.

This judgment, delivered by the Chennai bench of the ITAT, is expected to bring much-needed relief to taxpayers who rely on long-term investments such as equities, real estate, and mutual funds to build wealth.

What Does Section 87A Rebate Mean?

Section 87A allows individual taxpayers with lower annual incomes to reduce their tax liability by claiming a rebate. Currently, under the new tax regime, individuals earning up to ₹7 lakh annually can claim a rebate of up to ₹25,000, while under the old tax regime, the rebate is available for incomes up to ₹5 lakh with a maximum benefit of ₹12,500.

So far, however, this rebate was applicable only to regular income and STCG, excluding LTCG since it is taxed at special rates. With the ITAT’s decision, even those earning capital gains from long-term investments can now avail the rebate, provided their total income remains within the prescribed limits.

The Case That Changed It

The matter came to light after a taxpayer from Tamil Nadu, Mr. Venkataraman, filed his return for AY 2024–25. He had included LTCG as part of his total income of ₹4.97 lakh and claimed a rebate of ₹12,500 under Section 87A. The Centralized Processing Centre (CPC) of the Income Tax Department rejected his claim, arguing that LTCG is taxed separately at special rates and therefore does not qualify for the rebate.

His appeal was also dismissed by the Commissioner of Income Tax (Appeals). However, the Chennai ITAT overturned these rulings on August 20, 2025, stating that LTCG should not be excluded from the scope of Section 87A when the taxpayer’s total income falls within the eligible threshold.

This precedent-setting decision means taxpayers across India can now claim rebate on LTCG, offering significant relief to small investors.

Understanding STCG vs. LTCG

• Short-Term Capital Gains (STCG):

  • Equity shares & equity mutual funds: Held for less than 12 months.

  • Real estate, debt mutual funds, gold: Held for less than 36 months (24 months in certain cases).

  • Tax Rate: 15% for equities (before July 23, 2024), or as per income slab for other assets.

• Long-Term Capital Gains (LTCG):

  • Equity shares & equity mutual funds: Held for 12 months or more.

  • Real estate, debt funds, gold: Held for 24 months or more.

  • Tax Rate: 12.5% on gains exceeding ₹1.25 lakh, plus cess and surcharge (with indexation for some assets).

Why This Matters

The decision is particularly important at a time when more Indians are turning to equities, real estate, and mutual funds for long-term wealth creation. By extending the rebate, the ITAT has effectively reduced the tax burden on small investors, especially those in lower income brackets.

For example, a taxpayer earning less than ₹5 lakh (old regime) or ₹7 lakh (new regime) annually, including LTCG, will now be able to claim a full rebate and pay zero tax. This move could encourage more individuals to participate in the capital markets and plan long-term investments without the fear of additional tax liability.

Key Takeaway

The Chennai ITAT’s ruling is a major win for taxpayers and could reshape how LTCG is treated under income tax law. While the Income Tax Department may still challenge this decision, for now, it provides immediate relief and clarity to long-term investors.

If upheld, this precedent will ensure that both short-term and long-term capital gains qualify for Section 87A rebate, giving small taxpayers a stronger financial cushion and making investment-led growth more attractive.