Can an Employer Give Credit for TDS Deducted on Sale of Property While Computing Salary TDS

Why the Answer Is an Unequivocal 'No' – A Statutory Interpretation Under the Income-tax Act.

By CA Surekha S. Ahuja

"A deductor can deduct tax only in the manner authorised by law. He cannot grant tax credit unless the statute expressly empowers him to do so."

A question frequently raised by employees and payroll teams is:

"The purchaser has already deducted TDS on my sale of immovable property. Can my employer reduce or adjust the TDS deductible from my salary?"

The legal answer is an unequivocal No.

The issue is not whether sufficient tax has already been deducted. The real question is whether the employer has statutory authority to recognise or adjust TDS deducted under another provision of the Income-tax Act while computing salary TDS.

The Income-tax Act, 2025 confers no such authority.

The Statutory Scheme Leaves No Scope for Adjustment

The Income-tax Act establishes independent statutory mechanisms for deduction of tax from different categories of income.

• Salary TDS is deducted by the employer on estimated taxable salary.
• TDS on sale of immovable property is deducted by the purchaser under a separate statutory provision.
• Credit for all eligible TDS is ultimately granted by the Income-tax Department after determining the taxpayer's total income and tax liability.

These are three distinct statutory functions entrusted to three different persons.

The Legislature has deliberately separated:

• deduction of tax,
• deposit of tax,
• grant of tax credit, and
• assessment of tax liability.

An employer performs only one of these functions—deduction of tax from salary.

He is not authorised to perform the others.

An Employer Cannot Exercise Powers Not Granted by the Statute

A fundamental principle of tax jurisprudence is that statutory powers must be expressly conferred.

A tax deductor is a creature of the statute. He cannot assume powers merely because they appear equitable or administratively convenient.

If Parliament intended an employer to adjust TDS deducted on property transactions against salary TDS, it would have expressly provided so.

The absence of such a provision is not an omission—it is a conscious legislative design.

Why This Function Belongs Only to the Income-tax Department

Permitting an employer to adjust property-related TDS would require the employer to determine questions such as:

• Has any taxable capital gain actually arisen?
• Is the gain exempt?
• Has the employee claimed rollover relief?
• Has the purchaser correctly deposited the TDS?
• Does the credit belong to the employee?
• What is the employee's final tax liability after considering all sources of income?

These are assessment functions, not payroll functions.

The employer has neither the statutory jurisdiction nor the factual machinery to decide them.

That responsibility rests exclusively with the Income-tax Department while processing the return of income.

Judicial Principles Support This Interpretation

The statutory framework is reinforced by settled legal principles:

• TDS provisions are mandatory machinery provisions and must be implemented strictly in accordance with the Act.
• An employer's responsibility is confined to correctly deducting tax from salary in accordance with the statutory provisions governing salary TDS.
• Grant of TDS credit is part of the assessment process and cannot be undertaken by a deductor.
• Administrative convenience or employee consent cannot enlarge statutory powers.

These principles are reflected in the jurisprudence of the Supreme Court, including decisions such as Eli Lilly, Transmission Corporation, and Hindustan Coca Cola, as well as CBDT guidance governing salary TDS.

Consequences of an Incorrect Adjustment

If an employer reduces salary TDS by considering TDS deducted on sale of property without statutory authority, the consequences may include:

• short deduction of salary TDS;
• proceedings treating the employer as an assessee in default, subject to statutory relief where applicable;
• interest liability under the TDS provisions;
• penalty proceedings, where attracted under the Act;
• payroll audit qualifications, departmental scrutiny and avoidable litigation.

An employee's declaration or request cannot validate an adjustment which the statute itself does not permit.

The Correct Compliance Approach

The law contemplates a simple and orderly process:

Employer  Deduct TDS only on estimated taxable salary.

Employee Claim credit for TDS deducted on sale of property while filing the return of income.

Income-tax Department

• Verify all TDS credits, compute the total tax liability and grant refund or raise demand, as the case may be.

Each stakeholder performs the function assigned by the statute—nothing more and nothing less.

Conclusion

The controversy is often viewed as a question of tax already paid.

Legally, it is a question of statutory authority.

The Income-tax Act does not authorise an employer to grant credit for TDS deducted on sale of immovable property while computing salary TDS.

The employer deducts tax. The purchaser deducts tax. The Income-tax Department grants tax credit.

No deductor can assume the statutory functions of another.

That is not merely a procedural requirement—it is the very architecture of the Income-tax Act.

Payroll is a mechanism for collection of tax. Assessment and grant of TDS credit remain the exclusive domain of the Income-tax Department

Foreign Dividends, Buy-backs & Overseas Corporate Actions in ITR-2 & ITR-3 — AY 2026-27

 By CA Surekha Ahuja

A practical guide to taxability, Foreign Tax Credit and correct disclosure

Indian investors are increasingly holding foreign shares, ETFs and overseas brokerage accounts. When these investments generate income — dividends, buy-back proceeds, merger consideration or liquidation distributions — the returns carry multi-schedule compliance obligations that go well beyond the usual salary-and-interest return.

Most disputes in this space arise not from wrong tax computation, but from reporting income under the wrong schedule, claiming Foreign Tax Credit (FTC) incorrectly, or missing a disclosure requirement altogether. This guide walks through each scenario for AY 2026-27.

Which ITR Form to Use?

Before getting into schedules, confirm the right form:

• ITR-2 — individuals and HUFs without business or professional income, but with foreign income, capital gains, or foreign assets. Due date: 31 July 2026.
• ITR-3 — individuals and HUFs who also have business or professional income (including F&O trading). Due date: 31 August 2026 (extended by the Finance Act, 2026 — do not rely on the old 31 July date).
• ITR-1 cannot be used if you have foreign income, foreign assets, or buy-back dividend income under Section 2(22)(f).

Quick Reference Matrix

Receipt	Taxability	Rate	Key Schedules
Foreign Dividend (ROR)	Taxable	Slab rate	OS + FSI + TR + Form 67 + FA (where applicable)
Dividend from Indian Company	Taxable	Slab rate	OS
NRI — Dividend from Indian Company	Taxable in India	Section 195 / DTAA rate	ITR + DTAA claim
Buy-back Receipt (payment received 01.10.2024 – 31.03.2026)	Deemed Dividend u/s 2(22)(f)	Slab rate	OS
Capital Loss on same Buy-back	Capital Loss	Capital-gains provisions	CG
Qualifying Amalgamation / Demerger	Generally exempt u/s 47	—	Disclosure as applicable
Cash Merger Consideration	Capital Gains	Applicable CG rates	CG
Liquidation Distribution	Section 46 implications	Case-specific	CG / OS
Return of Capital	Cost adjustment / CG	Case-specific	CG

Foreign Dividend Income

Taxability by Residential Status

Status	Taxable in India?
Resident & Ordinarily Resident (ROR)	Yes
Resident but Not Ordinarily Resident (RNOR)	Depends on facts and source
Non-Resident (NR)	Generally no, unless received/deemed to arise in India

Common Misconceptions — None of These Create an Exemption

• Dividend received outside India
• Dividend retained in the foreign account and not remitted
• Dividend automatically reinvested (e.g. DRIPs)

In all three cases, the income is taxable for a ROR taxpayer in the year it arises.

Report Gross, Not Net

The gross dividend — before any foreign tax withholding — must be reported in Schedule OS. Foreign tax deducted at source does not reduce the taxable income; it is recovered separately through the FTC mechanism.

Illustration:

Particulars	USD
Gross Dividend	1,000
Foreign Tax Withheld @ 25%	250
Net Amount Received	750

Report INR equivalent of USD 1,000 in Schedule OS. Claim credit for the withholding tax separately — subject to the FTC ceiling (lower of tax paid abroad or Indian tax attributable to that income).

Schedule Mapping for Foreign Dividend

Item	Where to Report
Dividend income	Schedule OS
Country-wise foreign income details	Schedule FSI
FTC claim	Schedule TR
FTC documentation	Form 67 (file before or with the return)
Foreign shares / overseas accounts	Schedule FA

Note: Schedule FSI is available to residents only. Ensure Schedule FSI figures reconcile exactly with Schedule OS.

Buy-back Taxation — The Key Change for AY 2026-27

What Changed and Why

For buy-backs by domestic companies where the payment is received between 1 October 2024 and 31 March 2026, the entire consideration received by the shareholder is treated as a deemed dividend under Section 2(22)(f) and taxed at the applicable slab rate.

Critical point on dates: The trigger is the date of actual receipt of payment, not the announcement date, record date, tender date or acceptance date. Using the wrong date can result in the wrong tax regime being applied.

Tax Treatment

Component	Treatment
Buy-back Consideration	Deemed Dividend u/s 2(22)(f) — taxable at slab rate
Capital Gains	Deemed Nil
Cost of Acquisition	Allowed as a capital loss

Illustration:

Particulars	Amount (₹)
Buy-back Proceeds	1,00,000
Cost of Acquisition	18,000
Capital Loss	(18,000)

Schedule	Entry
Schedule OS	Dividend ₹1,00,000
Schedule CG	Capital Loss ₹18,000

AY 2026-27 ITR forms include a dedicated row in Schedule CG for buy-back losses. The loss entry will only be accepted if the corresponding dividend is disclosed in Schedule OS → Sl. No. 1a(iii). These two entries are interdependent — missing one will make the other invalid.

Set-off and Carry Forward of Buy-back Loss

Loss Type	Can Be Set Off Against
Short-Term Capital Loss (STCL)	STCG and LTCG
Long-Term Capital Loss (LTCL)	LTCG only

The loss cannot be set off against salary, house property, business income, dividend income or any other head. Where the return is filed by the due date, the loss may be carried forward for up to 8 assessment years.

Taxpayers who miss the filing deadline lose the right to carry forward this loss — another reason to file on time.

NRI Investors — Key Points

Particulars	Position
Dividend from Indian Company	Taxable in India
Buy-back Dividend u/s 2(22)(f)	Taxable in India
TDS Provision	Section 195
Standard TDS Rate	20% plus applicable surcharge and cess
DTAA Benefit	Available, subject to eligibility and documentation

Documents needed for treaty benefit:

• Tax Residency Certificate (TRC) from the country of residence
• Prescribed declarations as applicable
• Supporting treaty documentation

NRIs should verify whether the DTAA with their country of residence caps withholding at a rate lower than 20% — the difference can be material.

Mergers, Demergers and Other Corporate Actions

Transaction	Broad Tax Treatment
Share-for-share Amalgamation satisfying Section 47 conditions	Generally exempt
Qualifying Demerger	Generally exempt
Cash Merger Consideration	Capital Gains
Fractional Share Cash Settlement	Capital Gains
Capital Reduction	Capital Gains implications
Liquidation Distribution	Section 46 implications
Return of Capital	Cost adjustment / Capital Gains

Always determine the legal character of a corporate-action receipt from the underlying transaction documents before classifying it as dividend income or capital gains. Labels used by brokers or company communications may not align with the tax characterisation.

Documents to Retain

Document	Purpose
Foreign broker statement	Dividend verification and cost records
Form 1042-S / foreign tax certificate	FTC support
Form 67	FTC claim (file before or with the return)
Overseas account statements	Schedule FA disclosure
Buy-back communication	Date of payment — Section 2(22)(f) determination
Contract notes and purchase records	Capital-loss computation
Tax Residency Certificate (TRC)	DTAA benefit for NRIs
AIS and Form 26AS	Reconciliation before filing

Pre-Filing Checklist

• ✅ Gross dividend (not net) reported in Schedule OS
• ✅ Schedule FSI reconciles with Schedule OS
• ✅ Form 67 filed where FTC is claimed
• ✅ Schedule TR reflects eligible FTC (capped at lower of foreign tax or Indian tax on that income)
• ✅ Schedule FA completed for all foreign shares and overseas accounts
• ✅ Buy-back dividend correctly disclosed under Section 2(22)(f) in Schedule OS
• ✅ Corresponding capital loss disclosed in the dedicated row in Schedule CG
• ✅ Both buy-back entries cross-linked — loss disclosure will not stand without dividend disclosure
• ✅ DTAA claims supported by TRC and prescribed documentation
• ✅ All figures reconciled against AIS and Form 26AS
• ✅ Correct ITR form confirmed (ITR-2 or ITR-3 — not ITR-1)

Key Accuracy Notes

A few points worth highlighting for AY 2026-27 specifically:

Buy-back from 1 April 2026 onwards falls under a different regime (capital gains treatment) — so if you received payment across both periods, the two tranches must be bifurcated and reported separately.

Interest deduction on dividend income: Taxpayers can claim a deduction for interest expenditure incurred to earn dividend income, capped at 20% of gross dividend income. No other expense deduction is permitted.

Advance tax and dividend: If a shortfall in advance tax instalment is on account of dividend income, interest under Section 234C is not charged — provided tax is paid in a subsequent instalment. This relief does not extend to deemed dividend under Section 2(22)(e).

In Summary

AY 2026-27 requires investors with foreign income or buy-back receipts to navigate multiple schedules, a new dedicated buy-back loss row in Schedule CG, and tighter cross-referencing between Schedule OS and CG entries. The cost of getting this wrong is not just a tax demand — it is the loss of carry-forward benefits, FTC claims and treaty relief that can take years to recover.

NRE Interest Taxability Decoded: When Is NRE, FCNR and RFC Interest Exempt and When Does Tax Begin

 By CA Surekha Ahuja

Many NRIs and returning Indians assume that interest remains exempt so long as the bank account continues to be labelled as an NRE account. The law, however, focuses not merely on the account name but on the residential status of the account holder, FEMA provisions and specific exemptions under the Income Tax Act. A misunderstanding of these rules can result in unnecessary tax payments, missed exemptions or avoidable scrutiny.

Every year, thousands of NRIs:

• Return to India permanently.
• Become Resident but Not Ordinarily Resident (RNOR).
• Continue operating NRE accounts after returning.
• Hold FCNR deposits and RFC accounts simultaneously.

The resulting question is simple:

Is the interest exempt or taxable?

The answer is not determined by the name of the account alone.

Instead, the answer depends upon:

1. FEMA residential status.
2. Type of account or deposit.
3. Availability of RNOR benefits.
4. Applicability of Sections 10(4)(ii) and 10(15)(iv)(fa).

The Law at a Glance

Section 10(4)(ii)

Section 10(4)(ii) exempts:

Interest on moneys standing to the credit of an individual in a Non Resident External Account maintained in accordance with FEMA and the rules made thereunder.

The provision effectively requires two conditions:

Condition	Requirement
Account Condition	Valid NRE account maintained as per FEMA and RBI regulations
Residential Status Condition	Holder should qualify as a person resident outside India under FEMA

Failure of either condition may result in loss of exemption.

The Most Important Principle

NRE Exemption Is Status Based and Not Account Based

This is perhaps the most important takeaway from the entire discussion.

Many taxpayers believe:

My bank still shows the account as NRE. Therefore the interest must be exempt.

The law does not operate in this manner.

The exemption follows the legal status of the account holder and not merely the nomenclature used by the bank.

Accordingly:

• An account may continue to be called NRE.
• Yet the exemption may cease because FEMA status has changed.

Understanding FEMA and Income Tax Residency

A major source of confusion is the difference between FEMA residency and Income Tax residency.

Particulars	FEMA	Income Tax Act
Primary Test	Purpose and intention of stay	Physical presence and day count
Relevance	NRE exemption	Taxability of income
Change in Status	Can change immediately upon permanent return	Determined under Section 6

Thus, a person returning permanently to India may become resident under FEMA immediately even though he may still qualify as a non-resident under the Income Tax Act for that year.

For NRE interest, FEMA status assumes greater significance.

Complete Taxability Matrix

Status of Individual	NRE Interest	FCNR Interest	RFC Interest
Non Resident	Exempt	Exempt	Not Applicable
RNOR	Generally Taxable	Generally Exempt subject to conditions	Generally Exempt
ROR	Taxable	Taxable	Taxable

This table captures the broad position applicable in most situations.

NRE vs FCNR vs RFC: Understanding the Difference

Particulars	NRE Account	FCNR Deposit	RFC Account
Governing Provision	Section 10(4)(ii)	Section 10(15)(iv)(fa)	Section 10(15)(iv)(fa)
Requires FEMA Non Resident Status	Yes	Not always	No
Benefit During RNOR	Generally unavailable	Generally available	Generally available
Taxable During ROR	Yes	Yes	Yes

This distinction is frequently overlooked and often leads to incorrect tax reporting.

Common Practical Situations

Situation 1: NRI Continues to Reside Abroad

Where an individual continues to remain a person resident outside India under FEMA and maintains a valid NRE account:

Result: NRE interest generally remains exempt under Section 10(4)(ii).

Situation 2: NRI Returns Permanently to India

Suppose an individual returns to India:

• For employment.
• To start a business.
• To settle permanently.
• Without a definite intention of returning abroad.

In such cases, FEMA residential status may change immediately.

Result: Future NRE interest may no longer qualify for exemption under Section 10(4)(ii).

Situation 3: Returning Indian Becomes RNOR

Many taxpayers assume RNOR status automatically preserves NRE exemption.

This is incorrect.

Deposit Type	Taxability During RNOR
NRE Deposit	Generally Taxable
Resident Deposit	Taxable
RFC Account	Generally Exempt
FCNR Deposit	Generally Exempt subject to conditions

RNOR status alone is not sufficient.

The nature of the deposit also matters.

Practical Illustration

Illustration

Mr. A returns permanently to India on 1 October 2026.

His NRE fixed deposit earns interest of Rs 4,00,000 during FY 2026-27.

Period	Tax Treatment
April to September	Generally Exempt
October to March	Generally Taxable

Where proper records are available, a reasonable allocation between exempt and taxable periods may be maintained.

Five Common Errors Made by Returning NRIs

Error	Consequence
Assuming NRE means permanently exempt	Incorrect reporting
Ignoring FEMA status	Tax exposure
Confusing RNOR with exemption	Incorrect tax position
Delaying account redesignation	Compliance issues
Missing RFC planning opportunities	Unnecessary tax cost

Practical Takeaway

Whenever an NRI returns to India, the following questions should be examined immediately:

1. Has FEMA residential status changed?
2. Is RNOR status available?
3. Are FCNR deposits being held?
4. Should balances be transferred to an RFC account?
5. Has the bank been informed of the change in status?

A review at this stage often prevents years of avoidable tax disputes.

Conclusion

The taxation of NRE interest is governed by one fundamental principle:

The exemption belongs to the status of the account holder and not merely to the name of the account.

An NRE account does not remain exempt simply because the bank has not redesignated it. Equally, the tax treatment cannot be determined solely by the residential status under the Income Tax Act.

A proper analysis requires consideration of FEMA status, the nature of the deposit, RNOR eligibility and the specific exemptions contained in Sections 10(4)(ii) and 10(15)(iv)(fa).

For most returning Indians, the real tax planning opportunity lies not in retaining the NRE label but in understanding how FEMA, RNOR, FCNR and RFC provisions interact. A timely review of these aspects can often make the difference between preserving a legitimate exemption and creating an avoidable tax liability.

LTCG under Section 112A after Finance Act 2025: Computation, Basic Exemption Limit, Surcharge, Tax Planning and ITR Reporting for AY 2026-27

 By CA Surekha S. Ahuja

New Tax Regime | AY 2026-27 (FY 2025-26)

Introduction

Part 1 examined the legal framework governing Long-Term Capital Gains taxable under Section 112A and clarified the position following Finance Act 2025 that the enhanced rebate under Section 87A cannot be used to reduce tax payable on such gains.

Once that position is understood, the more important questions become practical.

How should Section 112A gains be computed?

How does the Basic Exemption Limit interact with Long-Term Capital Gains?

What benefits continue to remain available despite the Finance Act 2025 amendment?

What planning opportunities remain permissible within the law?

How should such gains be reported in the Income Tax Return?

This article addresses these practical aspects.

Five Numbers Every Investor Should Know

Particulars	FY 2025-26
Basic Exemption Limit under New Regime	₹4,00,000
Annual Exemption under Section 112A	₹1,25,000
Tax Rate under Section 112A	12.5%
Maximum Surcharge on Section 112A Tax	15%
Maximum Effective Tax Burden on Section 112A Gains	Approximately 14.95%

These five numbers drive most Section 112A computations.

The Most Important Provision Investors Often Miss

While most discussions focus on the 12.5% tax rate and the annual exemption of ₹1.25 lakh, an equally important provision is often overlooked.

Before the special rate under Section 112A is applied, the law requires consideration of the Basic Exemption Limit.

Statutory Provision

The first proviso to Section 112A(2) provides:

"Where the total income as reduced by such long-term capital gains is below the maximum amount which is not chargeable to income-tax, then, such long-term capital gains shall be reduced by the amount by which the total income as so reduced falls short of the maximum amount which is not chargeable to income-tax."

Legislative Intent and Interpretation

The purpose of the proviso is simple.

A taxpayer should not lose the benefit of the Basic Exemption Limit merely because a portion of the income consists of Long-Term Capital Gains taxable under Section 112A.

Accordingly, the law requires a comparison between:

• The Basic Exemption Limit; and
• The taxpayer's income excluding the Long-Term Capital Gains taxable under Section 112A.

Where such income is below the Basic Exemption Limit, the amount of the shortfall must first be reduced from the Long-Term Capital Gains before the special rate under Section 112A is applied.

Only thereafter is the annual exemption of ₹1,25,000 under Section 112A considered.

What the Provision Does Not Mean

The proviso does not create a separate deduction.

It does not provide an additional exemption.

It does not automatically permit every taxpayer to reduce Long-Term Capital Gains by ₹4 lakh.

The relief is available only to the extent that income excluding Long-Term Capital Gains falls short of the Basic Exemption Limit.

Where income chargeable at normal rates already equals or exceeds the Basic Exemption Limit, no benefit remains available under this proviso.

Practical Illustration

Assume a resident individual has:

• Salary Income: ₹2,50,000
• Long-Term Capital Gains taxable under Section 112A: ₹6,00,000

Step 1 – Determine the Shortfall in the Basic Exemption Limit

Particulars	Amount (₹)
Basic Exemption Limit under New Regime	4,00,000
Income excluding LTCG	2,50,000
Shortfall	1,50,000

Since the income excluding Long-Term Capital Gains is below the Basic Exemption Limit, the shortfall of ₹1,50,000 becomes eligible for adjustment under the first proviso to Section 112A(2).

Step 2 – Reduce the Shortfall from LTCG

Particulars	Amount (₹)
LTCG under Section 112A	6,00,000
Less: Adjustment under first proviso to Section 112A(2)	(1,50,000)
Balance LTCG	4,50,000

Step 3 – Apply the Annual Exemption under Section 112A

Particulars	Amount (₹)
Balance LTCG	4,50,000
Less: Annual Exemption under Section 112A	(1,25,000)
Taxable LTCG	3,25,000

Step 4 – Compute Tax

Particulars	Amount (₹)
Taxable LTCG	3,25,000
Tax @ 12.5%	40,625
Health and Education Cess @ 4%	1,625
Total Tax Liability	42,250

Understanding How Much LTCG Can Escape Tax

A common oversimplification is that ₹5.25 lakh of Long-Term Capital Gains is always tax-free.

That is not what the law provides.

The amount of LTCG that escapes tax depends on the extent to which the Basic Exemption Limit remains unutilised.

Income Excluding LTCG	Shortfall in Basic Exemption Limit	Section 112A Exemption	Total LTCG Escaping Tax
Nil	₹4,00,000	₹1,25,000	₹5,25,000
₹1,00,000	₹3,00,000	₹1,25,000	₹4,25,000
₹2,50,000	₹1,50,000	₹1,25,000	₹2,75,000
₹4,00,000 or more	Nil	₹1,25,000	₹1,25,000

Thus, the benefit under the first proviso to Section 112A(2) gradually reduces as income chargeable at normal rates increases.

Benefits That Continue To Remain Available

Annual Exemption of ₹1.25 Lakh

The first ₹1,25,000 of eligible Long-Term Capital Gains continues to remain exempt every financial year.

Unlike the rebate under Section 87A, this exemption is not linked to any income threshold and remains available irrespective of the taxpayer's income level.

Grandfathering Continues

For eligible equity investments acquired before 31 January 2018, the grandfathering provisions introduced when Section 112A was enacted continue to apply.

Accordingly, appreciation accrued up to 31 January 2018 remains protected in accordance with the statutory computation mechanism.

No Change in Indexation Position

Section 112A continues to tax gains without the benefit of indexation.

Surcharge Cap Continues

The surcharge on tax attributable to gains under Section 112A continues to remain capped at 15%.

Why the Surcharge Cap Matters

A taxpayer with very high ordinary income may otherwise be exposed to surcharge rates of up to 37%.

However, tax attributable to Long-Term Capital Gains taxable under Section 112A continues to enjoy a statutory surcharge ceiling of 15%.

As a result, the effective tax burden on such gains remains substantially lower than the maximum rate applicable to ordinary income.

Tax Planning Opportunities Within the Law

Annual Exemption Utilisation

The annual exemption of ₹1.25 lakh under Section 112A resets every financial year.

Investors may consider periodic review of their portfolios to ensure efficient utilisation of the available exemption.

Low-Income Years

Years involving retirement, sabbaticals, business losses, career transitions or temporary reduction in income may allow greater utilisation of both:

• The Basic Exemption Limit; and
• The annual exemption under Section 112A.

Capital Loss Management

Long-Term Capital Losses may be adjusted against eligible Long-Term Capital Gains in accordance with the provisions governing capital gains.

Proper utilisation of carried-forward losses can significantly reduce future tax liability.

Financial Year-End Review

A year-end review of gains, losses, holding periods and exemption utilisation remains one of the most effective tax planning exercises available to long-term investors.

Important Clarifications for Investors and Taxpayers

Rebate Eligibility and LTCG Taxation Are Two Different Concepts

A taxpayer may satisfy the conditions for rebate under Section 87A and yet remain liable to pay tax on Long-Term Capital Gains taxable under Section 112A.

Eligibility for rebate and computation of LTCG tax operate independently under the Act.

The Basic Exemption Limit Does Not Automatically Reduce LTCG

The benefit under the first proviso to Section 112A(2) arises only where income excluding Long-Term Capital Gains falls below the Basic Exemption Limit.

Once income chargeable at normal rates equals or exceeds the Basic Exemption Limit, no relief is available under the proviso.

The Annual Exemption of ₹1.25 Lakh Is Available Regardless of Income Level

Unlike the rebate under Section 87A, the annual exemption under Section 112A is not linked to income thresholds.

The exemption remains available even where the taxpayer's income runs into several crores.

Chapter VI-A Deductions Do Not Reduce Section 112A Gains

Deductions available under Sections 80C, 80D, 80G and other provisions of Chapter VI-A do not reduce Long-Term Capital Gains taxable under Section 112A.

The 15% Surcharge Cap Continues To Protect Equity Investors

Even where a taxpayer falls within a higher surcharge bracket, tax attributable to gains under Section 112A continues to enjoy the statutory surcharge ceiling of 15%.

Accurate Reporting in Schedule CG Remains Critical

The annual exemption under Section 112A should be claimed through the prescribed computation mechanism.

Investors should avoid reporting only the net gain figure and should carefully reconcile disclosures with AIS, broker statements and demat records.

ITR Filing Precautions

Use the Correct Return Form

Situation	Applicable Return
Capital gains and no business income	ITR-2
Capital gains along with business income	ITR-3
Taxpayer having capital gains	Not eligible for ITR-1

Report Gross Gains

Gross Long-Term Capital Gains should be disclosed in Schedule CG.

The exemption under Section 112A should be claimed through the prescribed computation mechanism rather than by reporting only a net figure.

Reconcile With AIS and Supporting Records

Before filing the return, reconcile:

• AIS
• Contract notes
• Broker statements
• Demat statements

to minimise mismatch-related notices and adjustments.

Review Grandfathering Computations Carefully

For investments acquired before 31 January 2018, grandfathering computations should be independently verified and not accepted blindly from pre-filled data.

Key Takeaway

While Finance Act 2025 settled the controversy relating to the availability of rebate under Section 87A against Long-Term Capital Gains taxable under Section 112A, the core structure of Section 112A remains largely unchanged.

The annual exemption of ₹1,25,000, the relief embedded in the first proviso to Section 112A(2), grandfathering protection for pre-31 January 2018 acquisitions, capital loss set-off provisions and the statutory surcharge cap of 15% continue to provide meaningful benefits to investors.

For AY 2026-27 onwards, successful tax planning will depend less on rebate-based interpretations and more on understanding the statutory computation mechanism, utilising available reliefs efficiently and ensuring accurate reporting of Long-Term Capital Gains in the Income Tax Return.

Section 87A Rebate and LTCG under Section 112A: What Finance Act 2025 Changed for AY 2026-27

By CA Surekha S. Ahuja

New Tax Regime | AY 2026-27 (FY 2025-26)

Finance Act 2025 Has Clarified the Legislative Position

One of the most debated questions in recent years was whether the rebate under Section 87A could reduce tax payable on Long-Term Capital Gains taxable under Section 112A.

The issue gained prominence after Finance Act 2025 increased the rebate under the new tax regime to Rs.60,000 and raised the income threshold to Rs.12 lakh.

Finance Act 2025 has now addressed the matter through an express statutory amendment.

For AY 2026-27 onwards, the law makes it clear that the enhanced rebate under Section 87A is available only against tax computed under the slab rates of the new tax regime and not against tax payable under special-rate provisions such as Section 112A.

The Three Provisions Every Investor Must Understand

The taxation of equity Long-Term Capital Gains under the new regime is now governed by the interaction of three provisions.

Section 112A

Section 112A applies to Long-Term Capital Gains arising from:

• Listed equity shares satisfying the prescribed STT conditions

• Units of equity-oriented mutual funds

• Units of business trusts

For AY 2026-27:

• Tax rate: 12.5%

• Annual exemption: Rs1,25,000

• Indexation: Not available

• Grandfathering provisions for assets acquired before 31 January 2018 continue to apply

Section 87A

Finance Act 2025 substantially enhanced the rebate available under the new regime.

Particulars	AY 2026-27
Maximum rebate	Rs.60,000
Threshold for rebate eligibility	Normal income taxable at slab rates not exceeding Rs12,00,000
Eligible taxpayer	Resident Individual

However, the enhancement came with an equally important restriction.

Section 115BAC

Section 115BAC(1A) contains the slab rates applicable under the default new tax regime.

The significance of this provision lies in the language used in the newly inserted second proviso to Section 87A.

The Finance Act 2025 Amendment

With effect from AY 2026-27, Finance Act 2025 inserted a second proviso to Section 87A which provides that the rebate shall not exceed the amount of income tax payable at the rates specified under Section 115BAC(1A).

This amendment is the key to understanding the new position.

Since tax under Section 112A is charged at a special rate and not at the slab rates prescribed under Section 115BAC(1A), the rebate cannot be used to reduce tax payable on such gains.

In practical terms:

✓ Rebate may reduce tax on salary income

✓ Rebate may reduce tax on business income

✓ Rebate may reduce tax on house property income

✓ Rebate may reduce tax on other slab-rate income

✗ Rebate cannot reduce tax on LTCG taxable under Section 112A

An Important Distinction Taxpayers Must Understand

The restriction on rebate against Section 112A gains is separate from the determination of rebate eligibility.

A taxpayer may satisfy the conditions of Section 87A and still be liable to pay tax on Long-Term Capital Gains under Section 112A.

For example, a resident individual having salary income within the prescribed rebate threshold and Long-Term Capital Gains taxable under Section 112A may qualify for the rebate in respect of the slab-rate tax. However, the tax payable on the Long-Term Capital Gain will continue to be computed separately under Section 112A and cannot be reduced by the rebate.

This distinction is likely to be one of the most important practical aspects of the amendment.

What Has Not Changed

Annual Exemption of Rs.1.25 Lakh Continues

The first Rs.1,25,000 of eligible Long-Term Capital Gains remains exempt every financial year irrespective of the taxpayer's income level.

Grandfathering Continues

For specified equity investments acquired before 31 January 2018, the grandfathering provisions introduced when Section 112A was enacted continue to apply.

Indexation Remains Unavailable

Section 112A continues to tax gains without the benefit of indexation.

Surcharge Cap of 15% Continues

The surcharge on tax attributable to gains under Section 112A remains capped at 15%, even where the taxpayer falls in a higher surcharge bracket.

Consequently, the effective tax burden on such gains remains substantially lower than the maximum tax burden applicable to ordinary income.

What the Amendment Actually Does

The amendment does not:

• Increase the tax rate under Section 112A

• Withdraw the annual exemption of Rs.1,25,000

• Remove grandfathering benefits

• Alter the statutory surcharge cap of 15%

Its primary effect is to restrict the enhanced Section 87A rebate to tax computed under the slab rates of the new tax regime.

Key Takeaway

Finance Act 2025 has provided legislative clarity on the interaction between Section 87A and Section 112A.

From AY 2026-27 onwards, the enhanced rebate of up to Rs.60,000 is available only against tax computed under the slab rates of the new tax regime. Tax payable on Long-Term Capital Gains under Section 112A remains outside the rebate mechanism and continues to be taxed separately at 12.5% after the annual exemption of Rs.1.25 lakh.

For investors and taxpayers, the focus should now move away from rebate-based interpretations and towards understanding the practical implications of Section 112A, including annual exemption utilisation, surcharge treatment, capital loss set-off, tax-efficient exit planning and accurate return reporting—topics that we examine in Part 2.

From Dead Terrace to Tax-Efficient Asset -The New Economics of Rooftop Monetisation After Sambhau Tirth for Builders

By CA Surekha Ahuja

For years, rooftops in India were treated as economically inactive spaces used only for water tanks, lift rooms and maintenance infrastructure.

That position has changed dramatically.

Today, rooftops generate substantial recurring income through:

• hoardings;
• telecom towers;
• LED billboards;
• branding rights;
• antenna installations;
• digital display systems; and
• smart-city infrastructure.

The Mumbai Tribunal ruling in Sambhau Tirth Co-operative Housing Society Ltd. v. DCIT has therefore become commercially significant far beyond the issue of hoarding income alone.

The judgment recognises an important economic reality:

modern real estate is monetised not only through floors and units, but also through elevation, visibility and rooftop rights.

What was once dead terrace space may now become a recurring tax-efficient revenue stream.

Why the Ruling Matters

The real significance lies in classification of income. Once rooftop receipts are assessed as:

“Income from House Property”

instead of:

“Business Income” or “Income from Other Sources”, major tax advantages arise.

Classification under Section 22 potentially enables:

• deduction under Section 24(a);
• lower effective taxable income;
• passive income treatment;
• improved post-tax yield.

This converts rooftop monetisation from an incidental receipt into a structured property-based income stream.

Why Builders and Developers Should Pay Attention

Builders frequently hold:

• unsold commercial towers;
• partially vacant malls;
• mixed-use projects;
• idle commercial buildings.

Even where sales slow down, rooftops and façades may independently generate recurring income through:

• hoarding rights;
• telecom installations;
• digital advertising systems;
• branding arrangements.

Most importantly:

substantial additional construction cost is usually unnecessary.

The asset already exists. The builder merely monetises structural positioning and visibility.

The Section 24(a) Advantage

The real planning opportunity lies in Section 24(a).

Illustratively:

Particulars	House Property	Other Sources
Rooftop receipts	₹20,00,000	₹20,00,000
Less: Municipal taxes	₹1,00,000	Nil
Less: Standard deduction u/s 24(a)	₹5,70,000	Nil
Taxable income	₹13,30,000	₹20,00,000

Potential reduction in taxable income:

₹6,70,000

For large developers operating multiple projects, the cumulative tax impact may become substantial.

The Most Important Tax Principle

The courts consistently distinguish between:

• exploitation of property rights; and
• conduct of advertising business.

This distinction is critical.

The strongest legal position arises where:

• rooftop or terrace rights are licensed;
• owner merely permits use of immovable property space;
• advertising operations remain with advertiser/licensee.

The income must arise from:

ownership and use of property, not from active commercial advertisement operations.

Biggest Mistake Builders Make

Many agreements are poorly drafted.

If documentation suggests that:

• builder operates advertising business;
• owner actively manages hoardings;
• commercial advertisement activity is undertaken by owner;

the Revenue may attempt classification as:

• business income; or
• income from other sources.

This may destroy Section 24(a) benefits.

Important Issue
Can Rooftop Income Be Set Off Against Project Interest?

This is where caution becomes extremely important.

Many builders may attempt to reduce rooftop income by claiming:

• interest on plot loans;
• project borrowing costs;
• construction finance interest.

However, project-stage interest generally retains capital character.

Interest incurred for:

• land acquisition;
• construction;
• development of project

up to completion is ordinarily required to be:

capitalised to Work-in-Progress or project cost.

Therefore:

rooftop income does not automatically permit deduction or set-off of capitalisable project interest.

This is a major litigation-sensitive area.

Practical Distinction Builders Must Understand

During Construction Stage

Where:

• project is under construction;
• interest is capitalised to WIP;
• temporary rooftop income arises,

the safer position generally remains:

• project interest continues to be capitalised;
• rooftop income remains separately taxable.

Aggressive netting-off may invite scrutiny and penalty exposure.

After Completion of Project

Where:

• building is completed;
• rooftop rights are licensed post completion;

Section 24(b) implications may potentially arise subject to statutory conditions.

This creates a materially different legal position.

Caution to Avoid Litigation and Penalties

The Sambhau Tirth ruling creates opportunity — but not immunity.

Authorities may challenge structures where:

• active business income is disguised as house property income;
• project interest is improperly claimed as deduction;
• sham rooftop arrangements are created;
• multiple commercial services are artificially bundled.

This may result in:

• reassessment proceedings;
• denial of deductions;
• interest liability;
• penalty exposure for inaccurate claims.

Therefore:

aggressive tax engineering should be avoided.

The safest approach remains:

• genuine rooftop licensing arrangements;
• proper drafting;
• separate accounting of rooftop receipts;
• clear distinction between capital and revenue expenditure.

GST and TDS Must Not Be Ignored

Builders should also examine:

• GST implications;
• TDS under Section 194-I;
• municipal permissions;
• local advertisement regulations.

Incorrect structuring may create:

• GST disputes;
• TDS defaults;
• disallowances and compliance exposure.

Integrated tax planning therefore becomes essential.

Conclusion

The Sambhau Tirth ruling may significantly reshape rooftop monetisation strategies for builders and developers.

The judgment recognises an evolving commercial reality:

real estate today generates value not only through occupation of floors, but also through monetisation of elevation, visibility and rooftop rights.

For builders, the ruling opens opportunities for:

• recurring passive income;
• monetisation of dormant terrace assets;
• improved project yield;
• Section 24(a) tax efficiency.

But the opportunity must be approached carefully.

The distinction between:

• property exploitation;
• advertising business;
• capital expenditure; and
• deductible property income

must remain properly preserved.

Ultimately, the next phase of urban real estate monetisation may not arise only from the building itself.

Increasingly, it may arise from the space above it.