Do Mutual Fund Gains Disqualify You from Section 87A Rebate?
If you’re a salaried taxpayer or a small investor filing under the New Tax Regime for FY 2025–26, you may wonder: “Will my mutual fund gains take away my ₹25,000 rebate under Section 87A?”
Here’s the clarity based on Income Tax rules, expert insights, and CBDT’s latest updates.
What Is Section 87A Rebate?
Under Section 87A, a resident individual with total income up to ₹7 lakh is eligible for a rebate up to ₹25,000, effectively making their tax liability zero under the New Tax Regime (Section 115BAC).
But the key lies in what counts as “total income.”
Does LTCG on Mutual Funds Affect Section 87A Rebate?
Yes — Long-Term Capital Gains (LTCG) on mutual funds are included in total income, and thus, they affect eligibility for the Section 87A rebate.
Breakdown:
| Particulars | Impact on Rebate |
|---|---|
| LTCG on Equity Mutual Funds (above ₹1 lakh) | Counts in total income |
| STCG under Section 111A | Also counted |
| Exempt LTCG (within ₹1 lakh) | No impact |
| Dividend income | IncludedS |
Bottom line:
If your total income including taxable MF gains exceeds ₹7 lakh, you lose the rebate under the New Tax Regime.
Example to Understand
- Salary income: ₹6.6 lakh
- LTCG on mutual funds: ₹80,000
- Total income: ₹7.4 lakh
You are not eligible for the Section 87A rebate, since total income crosses ₹7 lakh.
Legal Reference
- Section 87A of Income-tax Act, 1961
- Section 115BAC(1A) – defines conditions for new tax regime
- CBDT Circular No. 4/2023 – clarified rebate applicability
- Finance Act, 2023 – updated rebate amount from ₹12,500 to ₹25,000
Expert View: A Common Filing Mistake
Many new investors assume LTCG is exempt and skip reporting it. But unreported gains can lead to mismatch notices. Always include LTCG in your return, even if under threshold — this helps calculate Section 87A eligibility correctly.
Key Takeaways
- Section 87A rebate is only for total income up to ₹7 lakh.
- MF gains (LTCG/STCG) add to total income.
- Even ₹1 over ₹7 lakh makes you ineligible.
- File your ITR carefully — include all income sources.
- Consider tax harvesting to stay within limits.
Related Post on Efiletax
ITR-1 vs ITR-2: Which Form to Use for Mutual Fund Income?
FAQs on Section 87A Rebate & MF Gains
Q1. Are mutual fund LTCG fully taxable under the new regime?
No, LTCG above ₹1 lakh on equity mutual funds is taxed at 10%.
Q2. Is Section 87A rebate available under old tax regime?
Yes, but the income limit remains ₹5 lakh, and rebate is ₹12,500.
Q3. Can I split LTCG across years to claim rebate?
Only if your sale is planned and falls under the ₹1 lakh exemption limit for LTCG in each year.
Final Thoughts
If you’re investing in mutual funds and opting for the New Tax Regime in FY 2025–26, track your gains carefully. Section 87A rebate is generous — but one missed calculation can wipe it out. Need help filing your return or tax planning?
Mutual fund gains are included in your total income under the New Tax Regime. If your total income, including LTCG or STCG, exceeds ₹7 lakh, you lose the Section 87A rebate. Learn how this affects your ITR filing and how to stay eligible.