Why capital gains do not get the section 87A rebate even if your slab income is under the limit

Under the new tax regime for FY 2025-26 (assessment year 2026-27), section 87A of the Income Tax Act 1961 grants a rebate of up to Rs 60,000 where a resident individual's total income does not exceed Rs 12,00,000. On paper this makes slab income up to that level tax-free, and millions of salaried taxpayers now assume the comfort extends to every rupee they earn. It does not. The moment a capital gain enters the return, part of the tax bill survives the rebate.

The Income Tax Department's own FAQ on section 87A for FY 2025-26 is explicit: the rebate offsets only the tax computed on income charged at normal slab rates. Short-term capital gains under section 111A (taxed at 20%) and long-term capital gains under sections 112 and 112A (equity LTCG at 12.5% above the Rs 1.25 lakh exemption, effective 23 July 2024) are charged at special rates and are carved out of the rebate calculation. This piece walks through the statutory language, a worked example at exactly Rs 12,00,000 of income, and the errors most often flagged in ITR scrutiny.

What the Section Says

Section 87A, as applied through section 115BAC(1A) for the default new regime, allows a resident individual a rebate from the income-tax payable. For FY 2025-26 the rebate is the lower of (a) Rs 60,000 or (b) the income-tax computed before cess, and it is available where total income does not exceed Rs 12,00,000. In the old regime the rebate remains up to Rs 12,500 where taxable income does not exceed Rs 5,00,000. You can revise your own numbers on the income tax calculator.

The decisive words in the department's FAQ are that the rebate applies to "income-tax on total income chargeable at normal rates". Indian income tax splits your income into two buckets. The first is slab income - salary, house property, business income, interest and most other heads - taxed under the section 115BAC slab schedule. The second is special-rate income, where the statute fixes a flat rate regardless of your slab: STCG on listed equity under section 111A at 20%, and LTCG on equity under section 112A at 12.5% above Rs 1.25 lakh. Section 87A bites only on the first bucket.

The FY 2025-26 slab schedule under the new regime, read against the Finance Act 2025, is as follows.

Note two structural points. First, the standard deduction for salaried taxpayers in the new regime is Rs 75,000, so a gross salary of Rs 12,75,000 lands slab income at Rs 12,00,000. Second, above Rs 12,00,000 of total income the rebate falls away but marginal relief steps in so the extra tax never exceeds the extra income; you can test that boundary on the marginal relief calculator. Neither the standard deduction nor marginal relief changes the core rule: a capital gain is never sheltered by the 87A rebate.

Worked Example

Take Meera, a salaried resident on the new regime for FY 2025-26. Her gross salary is Rs 11,75,000; after the Rs 75,000 standard deduction her salary income is Rs 11,00,000. During the year she also books Rs 1,00,000 of short-term capital gain on listed shares sold within twelve months, chargeable under section 111A. Her total income is therefore Rs 12,00,000 - exactly at the section 87A threshold.

Her slab tax is computed only on the Rs 11,00,000 of salary income: nil on the first Rs 4,00,000, 5% on the next Rs 4,00,000 (Rs 20,000), and 10% on the remaining Rs 3,00,000 (Rs 30,000), giving Rs 50,000. Because her total income of Rs 12,00,000 does not exceed the threshold, section 87A applies - but the rebate is capped at the tax on slab income, so Rs 50,000 is wiped out and the slab bucket becomes nil.

Now the capital gain. The Rs 1,00,000 STCG is taxed under section 111A at a flat 20% - that is Rs 20,000 - and section 87A cannot touch it. Adding the 4% health and education cess of Rs 800, Meera's final liability is Rs 20,800. Run the same figures through the capital gains calculator and the new-regime calculator and the split is unmistakable.

The contrast is what stings. Had all Rs 12,00,000 been salary, the slab tax would be Rs 60,000 (Rs 20,000 at 5% plus Rs 40,000 at 10%), the full Rs 60,000 rebate would erase it, and Meera would pay nothing. The identical Rs 12,00,000 of total income produces a Rs 0 bill when it is pure salary and a Rs 20,800 bill the instant Rs 1,00,000 of it is a capital gain.

Common Mistakes

The single most common scrutiny trigger is claiming the full Rs 60,000 rebate against a return that mixes slab income with capital gains. Filers subtract the whole rebate from total tax, including the tax on 111A or 112A gains, and report nil. The Central Processing Centre recomputes the rebate on slab income alone under section 143(1), raises a demand for the capital-gains tax, and adds interest under sections 234B and 234C. If you receive such a notice, our guide on how to respond to an outstanding demand explains the agree, disagree, and partial-dispute options on the portal.

A second error is confusing the Rs 1.25 lakh LTCG exemption under section 112A with the section 87A rebate. They are unrelated. The Rs 1.25 lakh is a per-year exemption that applies before the 12.5% LTCG rate is charged; the 87A rebate is a slab-tax rebate that never applies to LTCG at all. A taxpayer with Rs 1,60,000 of equity LTCG pays 12.5% on the Rs 35,000 above the exemption regardless of how low the rest of their income is.

Third, filers often forget that the total-income test for eligibility includes the capital gain. If Meera's STCG had been Rs 2,00,000, her total income would be Rs 13,00,000, above the Rs 12,00,000 threshold, and section 87A would be denied on the slab income too - only marginal relief would soften the jump. The gain therefore hurts twice: it is taxed at 20%, and it can push total income past the rebate ceiling.

A fourth mistake is assuming the old regime behaves differently. It does not. Under the old regime the rebate caps at Rs 12,500 for taxable income up to Rs 5,00,000, and it likewise excludes 111A and 112A income. The special-rate carve-out is a feature of how the rebate is computed, not of which regime you pick; compare both on the old vs new regime tool.

FAQ

Does the section 87A rebate apply to short-term capital gains on shares?

No. STCG on listed equity is charged under section 111A at a flat 20% (raised from 15% by the Finance (No. 2) Act 2024), and this tax falls outside the section 87A rebate. Even if your total income is within Rs 12,00,000, the 20% on the gain remains payable, plus 4% cess.

If my total income is exactly Rs 12,00,000 including capital gains, do I still get some rebate?

Yes, but only against the tax on your slab income. If your slab income is Rs 11,00,000 and Rs 1,00,000 is STCG, the rebate erases the Rs 50,000 slab tax, while the Rs 20,000 tax on the gain stays. The rebate is capped at the lower of Rs 60,000 or the slab tax.

Are long-term capital gains on equity covered by the rebate?

No. LTCG on listed equity is taxed under section 112A at 12.5% on gains above the Rs 1.25 lakh annual exemption (rate effective 23 July 2024). That 12.5% is a special rate and section 87A does not offset it. The LTCG is taxed on its own, however small your salary.

Can capital gains push me above the Rs 12,00,000 limit and cancel my rebate entirely?

Yes. The Rs 12,00,000 eligibility test is on total income, which includes capital gains. A large gain can lift total income above the threshold, denying the rebate on your slab income as well - subject only to marginal relief, which caps the extra tax at the extra income above Rs 12,00,000.

Does this rule change if I choose the old tax regime?

No. The old-regime rebate is up to Rs 12,500 for taxable income up to Rs 5,00,000 and it also excludes section 111A and 112A income. Switching regimes changes the slab tax, never the special-rate carve-out on capital gains.

Is indexation available to reduce the capital gain before this tax applies?

For listed equity under sections 111A and 112A, no indexation is allowed. Indexation using the Cost Inflation Index (376 for FY 2025-26, per Notification 70/2025) applies to certain other long-term assets under section 112; you can read our note on the Cost Inflation Index of 376 and the indexation glossary entry.

Where can I read the official position?

The Income Tax Department's FAQ, "What is rebate under section 87A for FY 2025-26 and who can claim it", sets out the exclusion of special-rate income. The statutory text of sections 87A, 111A, and 112A is on indiacode.nic.in. When your return mixes heads of income, computing the rebate on the slab bucket alone is the only defensible position.