Debt Fund Section 87A Tax Rebate: The Ask Wallet Wise query is simple but important.
The reader asked: “I have long-term capital gains of Rs 2 lakh from a debt fund… realised after April 1, 2023, and redeemed on December 1, 2025. I also have a regular income of around Rs 10 lakh. Some CAs are saying that only Rs 10 lakh will be set off against the rebate u/s 87A. And long-term capital gains will be taxed at 12.50 percent. I understand that investments made in debt funds after April 1, 2023, will be taxed as short-term capital gains and added to the slab rate. Please clarify.”
The key point is that the debt-fund part bought after April 1, 2023 does not get long-term capital gain treatment. It is treated as short-term capital gain under Section 50AA, no matter how long it was held. The Income Tax Department also says short-term capital gains are taxed at the person’s normal slab rate.
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What Section 87A Means Now
The rebate under Section 87A works on total income under the new regime. For a resident individual, the official threshold list says a rebate of up to Rs 60,000 is available if total income chargeable under section 115BAC(1A) is up to Rs 12 lakh. The department also says this rule is effective from AY 2026-27. That means the rebate is not checked only against salary or regular income. It is checked against the whole taxable income.
What This Means For The Rs 2 Lakh Gain
So, in this case, the Rs 2 lakh from the debt fund bought after April 1, 2023 should be added to income taxed at slab rates. It is not to be taxed as long-term capital gain at 12.50%. The better reading is that the full taxable amount, including this debt-fund gain, is tested for the new-regime 87A limit. If the total income stays within the Rs 12 lakh band, the rebate can apply, subject to the rules in force for the year and the tax regime chosen.
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For debt-fund units bought before April 1, 2023, the tax path is different. The current capital-gains rules say long-term gains on assets transferred on or after July 23, 2024 are taxed at 12.5% without indexation, while short-term gains continue to be taxed at the applicable slab rate.
