Upstox Warns ₹12 Lakh Section 87A Rebate Excludes Share Capital Gains Under New Tax Regime

(INDIA) — Indian taxpayers are weighing whether share-market profits can be reported as business income instead of capital gains before they file returns under the new tax regime, a question that has taken on added weight after the higher Section 87A rebate for income up to ₹12 lakh. The issue surfaced in an Upstox personal finance Q&A updated on April 22, 2026, where tax expert Balwant Jain examined whether a taxpayer with share profits, dividends and bank interest could cut tax by treating market gains as business income.

Jain’s answer turned on classification, not preference. Share-market profits can fall under “Capital Gains” or “Profits and Gains of Business or Profession,” but only the facts decide which head applies.

That distinction now affects how far the rebate can go. If gains from listed shares fall under special-rate provisions for capital gains, the rebate does not operate in the same way as it does for income taxed at normal slab rates.

From Assessment Year 2026-27, the rebate under Section 87A in the new tax regime was enhanced for resident individuals with eligible income up to ₹12 lakh. The Finance Bill, 2025 memorandum says the rebate limit under Section 87A was proposed to increase from ₹7 lakh to ₹12 lakh and the rebate amount from ₹25,000 to ₹60,000 for eligible resident individuals under Section 115BAC.

That relief does not extend evenly across all income categories. The same memorandum says tax on incomes chargeable at special rates, including capital gains under sections 111A and 112, is not included while determining the rebate under the first proviso to Section 87A, and that the rebate is not available on tax on incomes chargeable at special rates.

That is why the character of share income has moved to the center of return-filing decisions. A taxpayer whose activity qualifies as a genuine trading business may see profits taxed as business income at normal slab rates, while a taxpayer whose activity remains investment may face capital-gains taxation even if total income stays below ₹12 lakh.

Indian tax law does not let taxpayers switch that label at will. Shares and securities may be capital assets or stock-in-trade, but intention, conduct, frequency of transactions, accounting treatment and the overall pattern of activity decide the answer.

CBDT Circular No. 6/2016 recognizes that shares and securities can be held either as capital assets or as stock-in-trade or trading assets, and even both, depending on the facts. The circular also says the question has long led to litigation because the dividing line between investment and trading is inherently fact-specific.

The circular gives taxpayers some room, but not an open choice. Where a taxpayer treats listed shares and securities as stock-in-trade, income from their transfer may be treated as business income; where listed shares and securities are held for more than 12 months and treated as capital assets, the Assessing Officer should generally not dispute that position.

Consistency runs through that approach. A taxpayer cannot change classification from year to year simply because one method produces a better result in a particular assessment year.

In practice, the tax department may look past the label used in the return and examine how the activity actually worked. Relevant factors include the number of transactions, the volume of trades, the holding period, the source of funds, whether borrowed money was used, whether separate books were maintained, how the shares were shown in accounts, whether delivery-based holdings were mixed with intraday or F&O activity, and whether the taxpayer operated a systematic profit-making trading setup.

An occasional buyer who holds shares as investments usually falls on one side of that line. Gains from those holdings are normally capital gains, and if the securities are listed equity shares with Securities Transaction Tax conditions satisfied, short-term capital gains may fall under Section 111A while long-term gains may fall under Section 112A.

A frequent buyer and seller who treats market activity as a business may fall on the other side. In that case the shares are stock-in-trade, profits may be business income, allowable expenses may be claimed subject to law, and the return will usually have to reflect business income schedules.

The filing temptation is easy to see. A salaried person with some side trading, a first-time investor, or a small taxpayer with dividend and bank-interest income may look at the higher rebate and ask whether reporting gains as business income would bring total tax down to nil. The law’s answer is narrower: the tax head must follow the real nature of the activity, not the tax result sought at filing time.

That leaves little room for cosmetic changes in classification after the year has closed. A person who behaved as an investor through the year, showed shares as investments, kept no trading books and then relabeled gains as business income solely because Section 87A appears more favorable is taking a position the law does not support.

The issue also carries a separate layer for overseas Indians. Section 87A is available only to resident individuals, so an NRI who remains non-resident for Indian tax purposes cannot generally rely on the rebate merely because Indian-source income is below the threshold.

Returning Indians face a different calculation. Residential status for the relevant financial year must first be worked out, because a person may be resident, non-resident, or resident but not ordinarily resident depending on days of stay and statutory conditions; only after that can rebate eligibility and the tax character of share income be assessed as separate questions.

The tax effect can be material even where the facts look modest. Listed-share gains taxed as capital gains may remain outside the rebate’s shelter, while business income taxed at slab rates may fit within it, which is why the same set of market profits can produce different outcomes once classification is settled.

That does not mean taxpayers are free to pick whichever route lowers the bill. The lawful question is whether the taxpayer was carrying on a share-trading business. If the answer is yes, business-income treatment may be supportable; if the answer is no, the gain remains capital gains even where total income is below ₹12 lakh.

A wrong call can carry more than a tax adjustment. Misclassification may invite scrutiny, demand, interest and litigation.

Recordkeeping becomes central for anyone planning to report share profits as business income. Taxpayers need conduct that matches the position taken in the return, along with clear records, demat and broker statements, a trading ledger, a bank trail and a defensible explanation for why the activity amounted to business rather than investment.

Mixed activity requires the same discipline. A taxpayer can maintain two portfolios, one for investment and one for trading, but the distinction must be real, documented and reflected in how the holdings are treated throughout the year.

That point matters most where long-term holdings are involved. Shares kept as investments should not be shifted into business stock simply because the rebate rules changed under the new tax regime.

Upstox’s discussion with Jain captures a broader tension now running through tax season. The higher rebate gives resident individuals relief on normal income, but it does not automatically erase tax on capital gains taxed at special rates, leaving the legal character of share income as the first question and rebate computation as the second.

Share-market profits can therefore be shown as business income only where the taxpayer is genuinely engaged in share trading and the facts support stock-in-trade treatment. Investors remain on the capital-gains route; genuine traders may use business-income treatment, but only with the records, consistency and compliance that position demands.