The Central Board of Direct Taxes (CBDT) has recently announced a significant change to the tax rebate calculation under Section 87A for the fiscal year 2025-26. According to the latest guidelines outlined in the Finance Act 2025, capital gains from specific assets will be excluded from the rebate calculations under the new tax regime.
Notably, this affects gains taxable under Sections 111A and 112, which have special rates applied under the Income-tax Act, 1961. This move is part of the broader financial adjustments made by the CBDT, impacting how taxpayers will calculate their eligibility for rebates in the upcoming financial year.
Under the new tax regime of Section 115BAC, resident individuals will not include incomes chargeable at special rates in the rebate calculation.
“It is provided that where resident individuals opt for the new tax regime of Section 115BAC, the incomes chargeable to tax at special rates (for example, capital gains taxable under Section 111A, Section 112, etc.) shall be excluded from calculating the Section 87A rebate,” the CBDT outlined.
This means that only income taxed at the standard slab rates, such as salary or business income, will be eligible for rebate consideration. As a result, taxpayers with significant capital gains may find their rebate eligibility affected under the new rules.
“Section 87A provides a rebate to resident individuals whose total income does not exceed a specified threshold. The rebate is deductible from the income tax before calculating the education cess. As per the Finance Act 2025, the threshold limit for rebate under section 87A under the new regime is increased from Rs 700,000 to Rs 12,00,000, thereby raising the tax rebate from Rs 25,000 to Rs 60,000. Further, the Central Board of Direct Taxes (CBDT) has also issued a clarification stating that effective 1 April 2025, income chargeable at special rate such as short-term capital gains (STCG) under section 111A and long-term capital gains (LTCG) under section 112 shall be excluded while calculating eligibility for rebate under section 87A under the new tax regime. This would mean that income taxed at special rates, such as STCG under Section 111A and LTCG under Section 112, will not be considered for the purposes of calculating rebate under Section 87A,” an tax expert said.
“Budget 2025 amended Section 87A of the Income Tax Act and increased the rebate to Rs 60,000 for resident individuals opting under the new regime for AY 2026-27 having taxable income up to Rs 12 lakhs. However, during the budget speech, our Finance Minister had specifically mentioned that the rebate wouldn’t be available on taxable capital gains under sections 111A and 112 of the Act. Therefore, even though an individual has taxable income in AY 2026-27 below Rs.12 lakhs but he will still have to pay tax on the short and long term capital gains at 20% and 12.5% respectively. This will increase the tax burden on small retail investors having capital gains from the stock market or mutual funds,” another tax expert said.
Explaining the updated tax rule, he said: “Let us take an example of a resident individual who earns a total income of Rs 10,00,000, including STCG under section 111A of Rs 200,000. Effective 1 April 2025, the said individual will not be eligible for a rebate on the STCG despite the total income being below the limit of INR 12,00,000. In light of the above, while CBDT clarification is a welcome move and may reduce unwarranted litigations, the resident individuals earning special income, i.e., capital gain, will be required to reassess their eligibility for rebate under section 87A if they opt for the new tax regime. The popular understanding of zero tax on income up to Rs. 12 Lakh may not hold true in cases where the income includes amounts taxed at special rates, such as LTCGs / STCGs. The exclusion of capital gains from the rebate calculation may result in a higher tax liability, and thus, they may be required to evaluate their income combination in order to minimize their tax liability under the new regime.”
Before this, under Section 87A of the Income Tax Act, a rebate of Rs 12,500 (old regime, income up to Rs 5 lakh) and Rs 25,000 (new regime, income up to Rs 7 lakh) was available for AY 2024–25. Initially, taxpayers who filed returns before July 5, 2024, could claim this rebate even on capital gains taxed under Sections 111A and 112. However, after the I-T Department updated the filing utility on July 5, the rebate was disallowed on such capital gains, affecting those who filed later, despite their income being below the threshold. This led to widespread taxpayer dissatisfaction and legal challenges.
Changes under New Tax Regime
In conjunction with these changes, the CBDT has increased the income threshold and the maximum rebate amount under Section 87A. For the fiscal year 2025-26, the income threshold for claiming a tax rebate has been raised from Rs 7 lakh to Rs 12 lakh, while the maximum rebate amount has been increased from Rs 25,000 to Rs 60,000.
“The income threshold for claiming a tax rebate under Section 87A for resident individuals taxable under the new regime of Section 115BAC has been increased from Rs 7 lakhs to Rs 12 lakhs, and the maximum rebate amount has been raised from Rs 25,000 to Rs 60,000,” the CBDT confirmed. This adjustment aims to provide more significant relief to taxpayers, provided their income does not include capital gains from special rate assets.
The impact of this directive means taxpayers with a mix of incomes need careful planning. For instance, an individual with a taxable income of Rs 12 lakh from salary and Rs 3 lakh from equity mutual funds will pay no tax on the salary portion due to the rebate but will be taxed on the capital gains as per the applicable rules. This highlights the importance of understanding the new regime, especially for those with diverse income streams. Short-term capital gains under Section 111A and long-term gains under Section 112, typically from equity shares and mutual funds, are directly affected.
