The Union Budget 2025 introduced a significant relief for taxpayers who opt for the new income tax regime. Under Section 87A, annual income up to ₹12 lakh is now fully tax-free through an enhanced rebate, offering a maximum benefit of ₹60,000—much higher than the ₹12,500 rebate under the old regime. But what happens if your income includes capital gains? Here’s everything you need to know.

1. What is Section 87A Rebate?

Section 87A provides a tax rebate for resident individual taxpayers with net taxable income below ₹12 lakh.

Key points:

· Applicable only under the new tax regime.

· Rebate can reduce income tax liability to zero for eligible taxpayers.

· Maximum rebate under the new regime: ₹60,000.

This change significantly increases disposable income for middle-class taxpayers.

2. Does Section 87A Apply to capital Gains?

Whether capital gains qualify for the Section 87A rebate depends on the type of gain:

· Short-term capital gains (STCG) on equity: Taxed at 15% and not eligible for the rebate.

· Long-term capital gains (LTCG) on equity above ₹1 lakh: Taxed at 10% and excluded from rebate.

· Capital gains from debt funds or property: Taxed at normal slab rates and may count toward Section 87A eligibility if included in total taxable income.

Important: Only income eligible under the new tax slabs counts for calculating the rebate. Gains taxed separately (like STCG on equities) do not reduce your tax liability under 87A.

3. Who Can Benefit From the Enhanced Rebate?

Eligible taxpayers include:

· Residents under the new income tax regime.

· Individuals with total taxable income ≤ ₹12 lakh, excluding exempted or separately taxed income.

· Salaried employees, freelancers, and small business owners who fall below the threshold.

Example: If your salary is ₹11 lakh and you have ₹50,000 LTCG from equity, you may not get the full ₹60,000 rebate, as the capital gains are taxed separately.

4. How the Enhanced Rebate Helps Taxpayers

· Zero tax liability for eligible income under ₹12 lakh.

· Higher disposable income due to a much larger rebate than the old regime.

· Encourages adoption of the new tax regime, which has lower slab rates.

5. Tips for Maximizing Tax Relief

· Separate capital gains from other income when planning taxes.

· Use exemptions and deductions available under the new regime wisely.

· Plan investment timing for capital gains to stay below thresholds for maximum rebate.

· Keep records of all income sources to correctly calculate taxable income for 87A.

6. Key Takeaways

· Section 87A provides up to ₹60,000 rebate for income up to ₹12 lakh.

· Capital gains taxed separately (like STCG on equities) are generally excluded from this rebate.

· Careful tax planning is essential to maximize benefits under the new regime.

Conclusion

Section 87A is a game-changer for middle-class taxpayers, but understanding which income qualifies is crucial. While the enhanced rebate provides significant relief for salaries and most income sources, capital gains can reduce the benefit, depending on the type and taxation. Proper planning ensures you maximize tax savings without violating rules.

 

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