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:

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):

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):

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.

The critical Section 111A restriction — why foreign equity STCG is different

This is the most technically important distinction, and it is the point most online summaries get wrong.

Section 111A applies only to short-term capital gains from equity shares or equity-oriented mutual funds that are:

1. Traded on a recognised stock exchange in India (BSE, NSE), AND
2. Subject to Securities Transaction Tax (STT) on the transaction

US-listed RSU shares (NYSE, NASDAQ) do not meet either criterion. There is no STT on US exchange transactions. There is no Indian exchange involved.

This means:

• STCG on foreign equity is NOT Section 111A income. It is taxed at slab rate under Section 112.
• The Section 87A proviso that Finance Act 2023 added (explicitly excluding Section 112A from 87A) does not restrict the 87A rebate for foreign equity slab-rate STCG — that income is slab-rate, where 87A applies normally.
• For slab-rate STCG (foreign equity), the 87A rebate applies to the entire slab-rate tax computation, including the STCG income stacked on top of salary.

Where taxpayers make the error: They see "STCG" and assume Section 111A applies at 20%. They then see that 87A is restricted for Section 111A income under CPC's processing stance. They incorrectly conclude 87A doesn't apply to their foreign RSU STCG. In fact, foreign equity STCG is slab-rate income — and 87A applies normally.

The opposite mistake — claiming 87A against Section 112 LTCG at 12.5% — generates a demand notice from CPC.

Worked example: how wrong categorisation creates an avoidable tax bill

Scenario — Rajesh incorrectly categorises foreign RSU STCG as Section 111A:

Rajesh has:

• Salary (including RSU perquisite at vest): ₹9.5 lakh
• STCG from RSU shares held 14 months (US-listed foreign equity): ₹2 lakh
• Total income: ₹11.5 lakh (within ₹12 lakh threshold for 87A)

Incorrect computation (CA applies Section 111A rate to foreign STCG):

• Tax on ₹9.5L salary at slab: ₹35,000
• 87A rebate: ₹35,000 (full slab tax wiped out)
• Tax on ₹2L STCG at "111A rate" 20% = ₹40,000
• Total with cess: ₹41,600

Correct computation (STCG is slab-rate under Section 112):

• Total slab income: ₹11.5L (salary + STCG)
• Tax on ₹11.5L: ₹0–₹4L = ₹0; ₹4L–₹8L = ₹20,000; ₹8L–₹11.5L = ₹35,000. Total = ₹55,000
• 87A rebate: ₹55,000 (income ≤ ₹12L; rebate cap ₹60,000)
• Tax after rebate: ₹0; cess: ₹0
• Total: ₹0

The incorrect categorisation generates a ₹41,600 tax bill. The correct categorisation produces zero tax. The entire difference arises from one wrong assumption about which section governs foreign equity STCG.

The reverse scenario generates a demand notice: a taxpayer with ₹8L salary and ₹3.5L LTCG (total ₹11.5L) claims ₹60,000 87A against all tax including the 12.5% LTCG tax of ₹43,750. CPC computes: slab tax ₹30,000 minus 87A ₹30,000 = ₹0; LTCG tax ₹43,750 × 1.04 = ₹45,500 payable. Section 143(1) demand: ₹45,500.

Using AIS TDS checks to prevent demand notices before filing

A significant source of demand notices arises not from the 87A rebate calculation but from TDS mismatches that inflate CPC's computed liability. Before filing:

1. Download AIS (incometax.gov.in → e-File → Income Tax Returns → View AIS). Check the TDS section — confirm TDS deducted by your employer on salary (including RSU perquisite) matches Form 26AS.

2. Cross-check Form 26AS vs Form 16. The Form 26AS TDS figure is the authoritative credit. If Form 26AS shows ₹1.8 lakh TDS but your Form 16 shows ₹2 lakh, the ₹20,000 gap generates a demand notice even if your 87A calculation is correct. Raise the discrepancy with payroll before filing.

3. Check for duplicate AIS income entries. AIS sometimes shows RSU sale proceeds twice — from the broker's reporting and from the bank's inward remittance record. Duplicate entries inflate AIS income and trigger automated mismatch. Submit AIS feedback marking duplicates before filing.

4. Verify AIS perquisite vs Form 16. If AIS shows a higher RSU perquisite than Form 16 Part B, your employer may have updated the TDS return after issuing Form 16. File based on what is correct and ask the employer to refile Form 24Q if it has errors.

Pre-filing AIS reconciliation for an RSU holder with a few vest events and sales takes 30–60 minutes and is the most effective step for preventing automated demand notices under Section 143(1).

New regime 87A at ₹60,000: the exact band where it eliminates tax

Under the new tax regime, the arithmetic is precise: tax on ₹12 lakh income = ₹0–₹4L (₹0) + ₹4L–₹8L (₹20,000 at 5%) + ₹8L–₹12L (₹40,000 at 10%) = ₹60,000 exactly. After the ₹60,000 87A rebate: ₹0 tax.

This is the band where the correct classification of foreign equity STCG as slab-rate (not Section 111A) makes all the difference. An RSU holder with ₹8L salary and ₹4L foreign equity STCG (total ₹12L) owes zero tax after 87A. The same taxpayer whose CA incorrectly applies a 20% "111A rate" to that ₹4L STCG would compute ₹80,000 — an entirely avoidable overpayment of ₹80,000 (plus cess).

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