Section 87A Rebate 2025–26: New ₹12L Limit & Tax Planning Tips

Section 87A Tax Rebate: Your Essential Guide for AY 2026-27 (FY 2025-26)

Let’s face it—navigating Indian tax rules can be a real headache, especially when the rules keep changing. If you’re a salaried individual or a taxpayer trying to make sense of what Section 87A means for you after the Union Budget 2025, you’re not alone. The government has shaken things up in a big way, and it’s crucial to know what’s changed, what hasn’t, and how it all affects your bottom line.

What’s New in Section 87A After Budget 2025?

If you’ve been following the news, you probably heard that Section 87A just got a major facelift. The Finance Act 2025 has expanded the rebate benefits under the new tax regime (Section 115BAC), and the numbers are eye-popping. The rebate eligibility threshold has jumped from ₹7 lakh to ₹12 lakh. And the maximum rebate amount? It’s gone from ₹25,000 to a whopping ₹60,000. That’s not just a tweak—it’s a game-changer for about a crore taxpayers who were previously paying taxes anywhere from ₹20,000 to ₹80,000.

But, as always, there’s a catch. The government has also clarified that certain types of income—like capital gains taxed under Sections 111A, 112, and 112A—are now officially excluded from rebate calculations under the new regime. This settles a long-standing debate and puts an end to confusion (and a fair bit of litigation) about whether you could claim a rebate on capital gains.

How Does the Rebate Work Now?

Let’s break it down by regime, because the rules are very different depending on which one you choose.

New Tax Regime (Section 115BAC) – FY 2025-26

If you’re a resident individual and your total income (excluding special rate incomes like capital gains) is up to ₹12 lakh, you can claim a rebate up to ₹60,000.
This rebate is only for income taxed at the regular slab rates. So, if you have capital gains taxed at special rates, those don’t count towards the ₹12 lakh threshold and don’t get the rebate.
The new regime doesn’t allow most traditional deductions, but it does offer lower tax rates, a higher standard deduction, and now, a much bigger rebate.

Old Tax Regime

Here, nothing has changed: if your total income is up to ₹5 lakh, you get a rebate of up to ₹12,500.
You can still claim all the usual deductions under Chapter VI-A (like 80C, 80D, etc.).
The rebate and exemption limits are lower, but the flexibility on deductions might work in your favor if you invest heavily in tax-saving instruments.

Capital Gains and Special Rate Income: The Big Clarification

This is where things get tricky. For years, taxpayers and even tax officers were unsure whether you could claim the Section 87A rebate on capital gains taxed at special rates (like short-term capital gains on shares, or long-term gains on equity funds). In July 2024, the CBDT shut the door on this by disabling rebate claims on special rate income. This led to a flurry of tax demand notices and appeals.

Then, in February 2025, the Mumbai Commissioner of Income Tax (Appeals) ruled that the rebate should be available on short-term capital gains, giving relief to many taxpayers. But the Budget 2025 amendments have now made it crystal clear: from FY 2025-26 onwards, no rebate on capital gains or other special rate income under the new regime. That chapter is closed.

What If You Have Both Salary and Capital Gains?

Let’s say you earn ₹8 lakh from your salary and ₹3 lakh from equity mutual fund gains. Under the new regime:

You’ll get the rebate on your salary income (since it’s within the ₹12 lakh limit), so you pay zero tax on that part.
But your capital gains will be taxed separately at the applicable special rates—no rebate applies there.

Other Budget 2025 Goodies: Standard Deduction and Marginal Relief

Standard Deduction Gets a Boost

Salaried folks, rejoice! The standard deduction under the new regime has been bumped up to ₹75,000 (from ₹50,000). This means if your gross salary is up to ₹12.75 lakh, you’ll still pay zero tax because the deduction brings your taxable income down to ₹12 lakh, right at the rebate threshold.

Marginal Relief: No More Tax Shock

Ever worried that earning just a rupee more could cost you thousands in extra tax? Marginal relief fixes that. For example, if your income is ₹12.10 lakh, you’ll pay only ₹10,000 in tax—not the ₹61,500 that would otherwise apply. This ensures a smooth transition and prevents a sudden tax jump if you cross the ₹12 lakh line by a small amount.

Filing and Compliance: Don’t Get Caught Out

Even if your rebate brings your tax liability to zero, you still have to file your Income Tax Return (ITR) if your total income is above the basic exemption limit. Under the new regime, that’s ₹3 lakh for everyone. The old regime still has age-based exemption limits.

And a word to the wise: if you’ve received a tax demand notice for claiming rebate on capital gains, and your case is from before FY 2025-26, you can appeal. Recent judicial decisions have ruled in favor of taxpayers, so don’t just pay up—fight your case.

Smart Tax Planning: How to Make the Most of Section 87A

Choose Your Regime Wisely: If you have lots of deductions (like insurance, PPF, home loan interest), the old regime might still be better for you. But if your income is mostly salary and you don’t claim many deductions, the new regime’s higher rebate and lower rates could save you more.
Plan Your Income: If you’re close to the ₹12 lakh threshold, think about how you time your income and investments. Deferring some income or capital gains could help you maximize your rebate.
Watch Out for Capital Gains: Since the rebate doesn’t apply to special rate income, consider the timing and amount of your capital gains. It could make a big difference to your final tax bill.