Section 87A rebate and RSU capital gains: what actually applies in AY 2026-27

In AY 2025-26, hundreds of Indian RSU holders received Section 143(1) intimations from CPC with demands for additional tax. The reason: they had claimed the Section 87A rebate against capital gains on their RSU share sales, and CPC's processing system denied it.

For AY 2026-27, the same question is live. The rebate under the new tax regime is now ₹60,000 (for income up to ₹12 lakh), which is significantly larger. And the rules around what it applies to — and what it doesn't — matter more than ever.

This article gives you the definitive answer for RSU holders.

First: understand your gain type

RSU capital gains in India fall into one of three categories depending on the listing status of the shares and the holding period:

Scenario	Gain type	Tax rate	Section
US-listed RSU shares held < 24 months	STCG	Slab rate	Section 112 (residual)
US-listed RSU shares held ≥ 24 months	LTCG	12.5% without indexation	Section 112
Indian-listed shares held < 12 months (rare for US RSUs)	STCG	20%	Section 111A
Indian-listed shares held ≥ 12 months	LTCG	12.5% above ₹1.25 lakh	Section 112A

Most Indian RSU holders have US-listed foreign equity — shares of US companies (MSFT, GOOG, CSCO, etc.) listed on NYSE or NASDAQ, not on BSE or NSE. These are not covered by Section 111A or 112A (which apply to transactions on recognised Indian stock exchanges with STT paid). They fall under Section 112 (general capital gains).

This distinction is critical for the 87A question.

The 87A rebate: what it is in AY 2026-27

Under the new tax regime for AY 2026-27:

• Rebate amount: ₹60,000 (up from ₹25,000 in AY 2025-26)
• Eligibility: total income ≤ ₹12 lakh
• Effect: if your total income is ₹12 lakh or below, your tax liability under the new regime is effectively zero

Under the old tax regime for AY 2026-27:

• Rebate amount: ₹12,500
• Eligibility: total income ≤ ₹5 lakh
• Effect: negligible for most RSU holders whose income exceeds ₹5 lakh

Most high-income salaried RSU holders will find the new tax regime more beneficial for AY 2026-27 given the enhanced rebate and changed slab structure.

The controversy: does 87A apply to special-rate capital gains?

What CPC says (and does in practice)

CPC's processing system computes 87A rebate against normal tax only — i.e., tax computed on income at slab rates. It separately computes tax on special-rate income (Section 111A STCG at 20%, Section 112A LTCG at 12.5%, Section 112 LTCG at 12.5%) and does not apply 87A against those special-rate taxes.

This is why RSU holders who were under ₹12 lakh total income (new regime) but had capital gains received 143(1) intimations: CPC zeroed out their slab tax via 87A but still charged them the special-rate capital gains tax.

What the law says

Section 87A reads: "An assessee, being an individual resident in India, whose total income does not exceed [threshold], shall be entitled to a deduction, from the amount of income-tax (before allowing credit for tax deducted at source and self-assessment tax paid) on his total income..."

The phrase "income-tax on his total income" is the crux. One interpretation: the rebate applies to the total tax including special-rate tax. Another interpretation: special-rate income produces a separate, distinct tax that is outside the "normal" income tax computation on which 87A operates.

The Finance Act 2023 added a proviso to Section 87A clarifying that it does not apply to the tax payable under Section 112A (LTCG on listed Indian equity). However, this proviso is silent on Sections 111A (STCG on listed Indian equity) and 112 (general LTCG including foreign equity).

The courts

The Bombay High Court and the Gujarat High Court have admitted petitions on this issue (from AY 2025-26 cases). No final ruling has been issued as of the date of this article. The matter remains sub-judice.

The safe position for AY 2026-27

Given CPC's current processing stance and the absence of a court ruling:

If your RSU gains are under Section 112 (foreign listed equity, LTCG or STCG at slab):

Gain type	Tax rate	87A position
STCG (< 24 months, slab rate)	Slab	87A applies — slab-rate income benefits from 87A normally
LTCG (≥ 24 months, 12.5%)	12.5%	Disputed — CPC denies; courts undecided; claim at your risk

For RSU holders with short-term gains (< 24 months holding, taxed at slab): the 87A rebate applies cleanly. Slab-rate income is the unambiguous territory for 87A.

For RSU holders with long-term gains (≥ 24 months, 12.5% under Section 112): do not claim 87A against the capital gains tax if you want to avoid a 143(1) intimation. Compute the LTCG tax at 12.5% separately and treat it as outside the 87A rebate.

Practical worked example: new tax regime, AY 2026-27

Inputs:

• Salary income (including RSU perquisite): ₹9,00,000
• STCG from RSU shares sold < 24 months after vest: ₹2,50,000 (at slab — this is foreign equity under Section 112)
• LTCG from RSU shares sold ≥ 24 months after vest: ₹1,00,000 (at 12.5% under Section 112)
• Total income: ₹12,50,000 (exceeds ₹12 lakh threshold → 87A not available)

Tax computation (new tax regime):

Income	Rate	Tax
Up to ₹4,00,000	0%	₹0
₹4,00,001–₹8,00,000	5%	₹20,000
₹8,00,001–₹9,00,000 (salary)	10%	₹10,000
₹9,00,001–₹11,50,000 (STCG at slab)	15%	₹37,500
₹11,50,001–₹12,50,000 (remaining slab)	20%	₹20,000
LTCG ₹1,00,000	12.5%	₹12,500
Total before rebate		₹1,00,000
87A rebate	—	₹0 (total income > ₹12 lakh)
Tax payable		₹1,00,000 + cess 4% = ₹1,04,000

Note: if the total income were ₹12,00,000 or below (STCG kept within that), 87A rebate of ₹60,000 would apply against slab-rate tax — but CPC would deny it against the 12.5% LTCG tax separately.

What if you get a 143(1) intimation denying 87A?

If CPC issues an intimation under Section 143(1) denying your 87A claim against capital gains:

1. If the denial is against STCG taxed at slab rate: file a rectification request under Section 154 on the ITD portal. Slab-rate STCG (from foreign listed equity under Section 112) should clearly qualify for 87A — CPC may have miscategorised it. Include a clear explanation.

2. If the denial is against LTCG at 12.5%: you can pay the demand (safe, avoids interest accrual) and await the court rulings. Or file a rectification request arguing that Section 112 LTCG is not excluded by the Section 87A proviso (which only explicitly excludes Section 112A). This is a live legal argument, not a settled position.

3. Either way: do not ignore the intimation. Unpaid intimation demands accrue interest.

Old tax regime: is it better for 87A claims?

For most RSU holders, no. Under the old regime:

• 87A rebate is ₹12,500 (not ₹60,000)
• Eligibility cap is ₹5 lakh (almost no RSU holder qualifies given vest-date perquisite income)
• Same controversy applies re: special-rate income

The old regime's 87A is irrelevant for the vast majority of RSU holders. The new regime's ₹60,000 rebate matters only if your total income is near ₹12 lakh.

Bottom line

Situation	87A position
STCG from foreign RSU shares (< 24 months, slab rate, new regime, income ≤ ₹12L)	Claim 87A — it applies
LTCG from foreign RSU shares (≥ 24 months, 12.5%, new regime)	Don't claim against LTCG tax — CPC will deny
Total income > ₹12 lakh (new regime)	87A unavailable regardless
Old regime, income > ₹5 lakh	87A unavailable regardless