With the implementation of the amended new tax regime under section 115BAC and the changes introduced by the Finance Act, 2025, tax planning for FY 2025–26 requires a fresh understanding—especially where special rate incomes such as capital gains are involved.
A common area of confusion is whether taxpayers earning Long-Term Capital Gains (LTCG) under section 112A or Short-Term Capital Gains (STCG) under section 111A can still claim the rebate under section 87A, and if so, how that rebate is computed.
This article addresses the following key questions for FY 2025–26 under the new tax regime:
Can a resident individual earning income taxable at special rates (STCG u/s 111A or LTCG u/s 112A) claim the rebate under section 87A?
How is the rebate computed when both normal income and special rate income are earned?
How do the basic exemption limit, LTCG exemption of ₹1.25 lakh, and rebate provisions interact?
A resident individual opting for the new tax regime can claim rebate under section 87A if:
Total income (excluding special rate income) does not exceed ₹12,00,000.
The rebate shall be the lower of:
Income tax payable on normal income, or
₹60,000
Importantly, the rebate cannot be adjusted against tax payable on special rate income such as capital gains.
Tax is computed on total income before surcharge and cess for rebate purposes.
Rebate is deducted before levy of surcharge and cess.
Only resident individuals are eligible—age is irrelevant.
Non-residents, firms, LLPs, and companies are not eligible.
Under the amended provisions applicable from FY 2025–26:
Special rate incomes (STCG u/s 111A, LTCG u/s 112A, etc.) are excluded while determining the ₹12 lakh threshold.
If normal income alone does not exceed ₹12,00,000, rebate eligibility remains intact—even if capital gains push gross income above ₹12 lakh.
No.
The rebate under section 87A cannot be set off against special rate income, including:
LTCG u/s 112A
STCG u/s 111A
Any other income taxed at special rates
Section 112A applies to long-term capital gains arising from the sale of:
Listed equity shares
Equity-oriented mutual funds
Holding period: More than 12 months
Tax rate: 12.5%
Exemption: ₹1,25,000
Indexation benefit: Not available
The basic exemption limit is ₹4,00,000, irrespective of age.
This limit can be adjusted against:
Normal income first
Balance (if any) against LTCG or STCG
This principle is critical and often misunderstood.
LTCG u/s 112A: ₹4,00,000
Basic exemption limit of ₹4,00,000 fully absorbs the income.
Tax payable: Nil
LTCG is not automatically taxable merely because it is taxed at 12.5%.
| Particulars | Amount |
|---|---|
| Salary | ₹3,00,000 |
| LTCG u/s 112A | ₹2,00,000 |
Basic exemption first absorbs salary.
Balance exemption applied to LTCG.
Remaining LTCG falls within ₹1.25 lakh exemption.
Tax payable: Nil
Normal income fully covered by basic exemption.
LTCG fully exempt u/s 112A.
Total income for rebate purpose = ₹4,00,000.
Tax payable: Nil
Normal income (₹11 lakh) eligible for rebate.
Tax on normal income = ₹50,000 → fully offset by rebate.
LTCG taxable portion:
₹3,25,000 – ₹1,25,000 = ₹2,00,000
Tax @12.5% = ₹25,000
Total tax payable: ₹25,000
Rebate cannot be adjusted against LTCG tax.
Basic exemption of ₹4,00,000 applied.
Exemption u/s 112A of ₹1,25,000 applied.
Net taxable LTCG = ₹6,75,000
Tax @12.5% = ₹84,375
Tax payable: ₹84,375
Total income for rebate purpose is NIL, but rebate cannot reduce LTCG tax.
If income marginally exceeds ₹12,00,000, rebate is lost.
Marginal relief ensures tax payable does not exceed the income exceeding ₹12,00,000.
Applicable only to normal income, not special rate income.
Basic exemption limit can be adjusted against LTCG.
Rebate u/s 87A applies only to normal income.
Capital gains must be reported at gross value—do not net off exemptions in the return.
Chapter VI-A deductions are not allowed against special rate income.
Marginal relief does not apply to capital gains.
The Finance Act, 2025 has formally clarified that:
Special rate incomes are excluded while testing the ₹12 lakh limit.
Rebate under section 87A cannot exceed tax payable under section 115BAC.
This amendment significantly benefits taxpayers with mixed income profiles under the new regime.
The interaction between Section 87A rebate and LTCG under Section 112A under the new tax regime offers meaningful relief—but only when understood correctly. While capital gains remain taxable at special rates, intelligent use of the basic exemption limit and clarity on rebate eligibility can result in nil or significantly reduced tax liability in many real-world scenarios.
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