STCG adjustment with basic exemption limit

1. Yes.
2.  Not allowed.

Thank you sir for the reply.

You are welcome.                 

This is one of the most common confusion points for AY 2026-27 ITR filing. Here is how it works:

Basic exemption limit adjustment for STCG: For resident individuals (below 60 years) with total income below 2.5 lakh (old regime) or below 3 lakh (new regime), the STCG on equity can be set off against the shortfall in the exemption limit. This is because STCG on equity is a special rate income but the exemption limit still applies first.

Example: Total income = 1.5 lakh (other income) + 3 lakh STCG on equity. Shortfall in exemption limit = 2.5 lakh - 1.5 lakh = 1 lakh. This 1 lakh can be adjusted against STCG, so taxable STCG = 3 lakh - 1 lakh = 2 lakh at 20%.

Section 87A rebate on equity STCG (critical update for AY 2026-27): From AY 2025-26 onwards (Finance Act 2024 amendment), Section 87A rebate of up to 12,500 under old regime or 25,000 under new regime CANNOT be applied against tax computed on special rate income like STCG on equity at 20%.

So even if your total tax liability after applying STCG tax would have been under 12,500, you cannot claim 87A rebate to reduce the STCG tax component. The 87A rebate applies only to tax on income taxed at normal slab rates.

This change caught many investors off-guard. Several taxpayers who filed early AY 2025-26 returns claiming 87A rebate against equity STCG received notices from the department.

Action: In your ITR, compute tax separately on special rate income (STCG/LTCG on equity) and claim 87A rebate only against the slab-rate income tax. Do not reduce the special rate tax with 87A.

For a detailed walkthrough, this guide may help: taxgarden.in/blog/capital-gains-tax-india-ltcg-stcg-ay-2026-27

For tax year 2026-27 under the new regime the basic exemption is Rs 4 lakh (not Rs 3 lakh), and the unused limit can absorb STCG on listed shares, so Rs 3.9 lakh total income bears nil tax; but the rebate of up to Rs 60,000 is not available against tax on STCG at the special 20% rate, so Rs 10 lakh STCG stays taxable.