87A rebate will fail to make your tax nil despite income below Rs 12 lakh in these cases, Budget 2025

You will end up paying income tax despite income under Rs 12 lakh if it includes special rate incomes as 87A rebate will not help to make the tax liability zero. Budget 2025 has now specified that income taxable at a special rate will not get the benefit of income tax rebate under section 87A. This includes income such as capital gains under section 111A (short term capital gains), section 112 (long term capital gains), etc.

This means if you have a total income of Rs 12 lakh out of which salary and other income is Rs 8 lakh but short term capital gains income on equity shares or mutual fund is Rs 4 lakh, then section 87A tax rebate will only be given on Rs 8 lakh. On the Rs 4 lakh capital gains income, taxpayers need to pay the income tax separately.

In above instance, if it is for income earned in FY 2026, there will be nil tax on income of Rs 8 lakh with 87A rebate. However, if Rs 4 lakh income is a short term capital gain then it will be taxed at special rate which is 20% so he/she will have to pay Rs 80,000 as tax.

Mihir Tanna, associate director, S.K Patodia LLP says, "In above instance, if person is not earning special income and opting new tax regime in FY 2026, there will be nil tax on income of Rs 8 lakh with 87A rebate. However, in same case if person earn Rs 4 lakh income is a short term capital gain (STCG) on sale of equity share or equity mutual fund then it will be taxed at speical rate which is 20%, so he/she will have to pay Rs 80,000 as tax."

In above example if you have a long term gain of Rs 4 lakh on listed equities then Rs 1.25 lakh will be exempted and you will need to pay 12.5% tax on the balance gain of Rs 2.75 lakh. As a result, you will end up paying a tax of Rs 34,375 on this long term capital gain.

Section 87A tax rebate on special rate income is not applicable for new tax regime only

Experts say that the 87A rebate disallowance will only be effective only in the New Tax Regime and not in the Old Tax Regime. “While the slab benefit has significantly been increased in the new regime u/s 115BAC, however, the bar of rebate benefit under section 87A on special rate related incomes such as Capital gains, speculative income from lotteries etc. does not extend to old regime and remain available under the said regime, said Rahul Garg, Managing Partner, Asire Consulting, which advises on tax, assurance and regulatory matters.

Tanna, says, “As per Budget 2025, under the new tax regime, Section 87A tax rebate will not be available on any special rate income (such as S. 111A, 112 etc). Whereas, for the old tax regime, Section 87A tax rebate is still available on special rate income like STCG covered in Section 111A,LTCG covered in Section 112.

In other words, Section 87A Rebate was never available on long term capital gain on equity (covered in Section 112A) under both regimes and no changes were made in the budget for the same.”

Income Tax FAQ about 87A tax rebate

The Income Tax Department said:

Q1. Whether special income having special rate such as capital gains, lottery etc. also be eligible for rebate?

Ans: No rebate is not available on income from capital gains or lotteries or any other income on which special rate has been provided in the Act. It is available only on the tax payable as per slabs under section 115BAC.

Q2. How will a person who has an income Rs 12 lac benefit from new rates?

Ans. Any individual earlier was required to pay a tax of Rs 80,000 (in the new regime) for an income of Rs. 12 lacs. Now he will be required to pay nil tax on such income.

Q.3. Whether the limit of total income for NIL tax payments has increased in this budget?

Ans. Yes, the limit of total income for NIL tax payments in the new tax regime has been increased to Rs. 12 lakhs in this budget provided the taxpayer files ITR to avail the rebate.

Q.4. What was the earlier limit of income for nil tax payment?

Ans. Earlier the limit of income for nil tax payment was Rs 7 lac. By increasing this limit to Rs 12 lakh around one crore assessees who were earlier required to pay tax varying from Rs 20,000 to Rs 80,000 will be now paying nil tax.

What is Section 87A tax rebate?

Under Section 87A eligible taxpayers get a total waiver of income tax if their total income is below Rs 5 lakh under the old tax regime. As proposed by Budget 2025, rebate will be available if total income does not exceed Rs 12 lakh. Under the old tax regime the maximum amount of Section 87A tax rebate is Rs 12,500 and under the new tax regime it is proposed to be enhanced to Rs 60,000.

What did explanatory memorandum to Budget 2025 say about Section 87A tax rebate

From assessment year 2026-27 onwards, for an assessee, being an individual resident in India whose income is chargeable to tax under the sub-section (1A) of section 115BAC, it is proposed to,–

(i) enhance the limit of total income for rebate in clause (a) and (b) of first proviso under section 87A, on which the income-tax is payable as per the rates of income-tax under sub-section (1A) of section 115BAC, from Rs. 7,00,000/- to Rs. 12,00,000/- and the limit of rebate in clause (a) of first proviso to section 87A from Rs. 25,000/- to Rs. 60,000/-.

(ii) rationalise the first proviso to section 87A by inserting a new proviso so as to provide that the deduction under the first proviso, shall not exceed the amount of income-tax payable as per the rates provided in sub-section (1A) of section 115BAC.

Further, as mentioned in para. 4 above, such rebate of income-tax is not available on tax on incomes chargeable at special rates (for e.g.: capital gains u/s 111A, 112 etc.).