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Published on 18 August 2025

Understanding the 2025-26 Income Tax Changes: Key Insights on Section 87A

Union Budget 2025-26: Personal Income Tax and Section 87A Explained

The Union Budget 2025-26 has brought in some major changes for individual taxpayers. While the updates make tax planning more attractive for salaried earners, they also come with certain limits that everyone should be clear about.

New Tax Regime Highlights

For Assessment Year 2026-27 (FY 2025-26), individuals with income up to ₹12.75 lakh will not pay any tax, thanks to the revised Section 87A rebate and a higher standard deduction of ₹75,000.

But this relief comes with an important caveat—it does not extend to special-rate incomes. That means short-term capital gains (STCG) and long-term capital gains (LTCG) on shares, mutual funds, or property sales will still be taxed, even if your overall income remains within the ₹12.75 lakh threshold.

Example: A Mumbai-based taxpayer with a salary of ₹12 lakh and bank interest of ₹60,000 owes no tax. But if she also earns ₹1 lakh LTCG by selling Reliance shares, that gain will be taxed separately under Section 112A.

What Changed with Section 87A?

The Finance Act 2025 has clarified a long-standing ambiguity. Starting AY 2026-27, no Section 87A rebate will be available against tax on special-rate incomes like:

  • STCG under Section 111A
  • LTCG under Section 112A

In other words, the rebate will only reduce tax payable on income taxed at normal slab rates—like salary, rent, or interest—not on gains from shares or other specified assets.

Comparing Past and Future Rules:

  • AY 2025-26 (FY 2024-25)

    • Old regime: Rebate up to ₹5 lakh total income.
    • New regime: Rebate up to ₹7 lakh total income.
    • Courts (like ITAT Ahmedabad) had held that rebate could technically apply even on STCG/LTCG, since there was no express prohibition in law.

  • AY 2026-27 (FY 2025-26 onwards)

    • No 87A rebate allowed on tax for LTCG (112A) or STCG (111A).
    • Relief applies only to slab-rate income.

Example: If someone earns ₹7 lakh salary and ₹60,000 STCG, the STCG portion will still be taxed at special rates—rebate won’t cover it.

Current Concerns: Taxpayers Facing Liabilities

For FY 2024-25 (AY 2025-26), there’s already confusion. ITR utilities are not permitting Section 87A rebate against special-rate incomes, even though the law does not explicitly block it for this year. Unless the Income Tax Department issues a clarification, taxpayers relying heavily on capital gains (STCG/LTCG) may still end up with a tax bill despite having income below ₹7 lakh.

How This Affects You

  • FY 2024-25 (AY 2025-26)

    • Under new regime: Rebate applies if income ≤ ₹7 lakh, but not being extended in utilities to capital gains.
    • Under old regime: Rebate applies if income ≤ ₹5 lakh, with some exclusions for LTCG.

  • FY 2025-26 onwards (AY 2026-27)

    • No 87A rebate at all for LTCG or STCG at special rates.
    • Only slab-rate income (salary, rent, interest) enjoys rebate relief.

Takeaway: Always check the source of your income. Regular income benefits from 87A; most capital gains do not.

FAQs

1. Is Section 87A available for STCG in FY 2024-25? Yes, by law it is. The rebate can be claimed if total income is within ₹7 lakh under the new regime. However, most ITR utilities are currently blocking it, awaiting CBDT instructions. Always consult a tax expert before filing.

2. Will LTCG treatment change from FY 2025-26? Yes. From AY 2026-27, Section 87A rebate cannot offset LTCG tax on listed equity shares or units. Such gains will be taxed at the prescribed rates without relief.

3. My income is ₹12 lakh salary plus ₹60,000 LTCG. Do I pay tax? Yes. While the salary qualifies for 87A rebate, the LTCG is taxed separately. Under the new law (AY 2026-27), no rebate can be set off against it.

4. If most of my earnings are from stock trading, will I get relief? No. From FY 2025-26, STCG and LTCG will be taxed at special rates even if your total income is below ₹12.75 lakh or ₹7 lakh. Only slab-rate incomes qualify for rebate.

Final Word: Consult Your Tax Advisor

These changes underline why tax planning cannot rely only on headlines. The Section 87A rebate looks generous, but its scope is limited once you factor in capital gains. With utilities and interpretations still in flux for FY 2024-25, professional advice is the safest way forward. Timely planning ensures you don’t end up under-claiming or paying more than necessary.

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