Decoding Section 87A Rebate and Capital Gains (STCG u/s 111A) in the New Tax Regime (FY 2025-26)
The Union Budget 2023 significantly revamped the new tax regime (Section 115BAC), making it the default option and increasing the rebate limit under Section 87A. While this brought considerable relief to many taxpayers, the interaction of this rebate with special rate incomes like Short-Term Capital Gains (STCG) under Section 111A has been a subject of much clarification and, at times, confusion.
Key Takeaway
As of Financial Year 2025-26 (Assessment Year 2026-27) and onwards, the stance of the Income Tax Department and the clear intent of the law is that Rebate under Section 87A is generally NOT allowed on Short-Term Capital Gains (STCG) taxable under Section 111A if you opt for the new tax regime (Section 115BAC).
Understanding the Key Provisions
Section 87A Rebate
This rebate reduces the income tax payable by a resident individual. For FY 2025-26 (AY 2026-27):
- The maximum rebate amount has been increased to ₹60,000
- The income threshold for claiming this rebate has been raised to ₹12 lakh
- Only resident individuals are eligible
Short-Term Capital Gains (STCG) under Section 111A
This section deals with STCG arising from the sale of equity shares listed on a recognised stock exchange (where Securities Transaction Tax - STT - has been paid) or units of an equity-oriented mutual fund. These gains are typically taxed at a special flat rate of 15% (before cess), regardless of your income slab, if your total income (including such gains) exceeds the basic exemption limit.
The Crucial Disqualification
The Finance Act, 2025, along with subsequent clarifications issued by CBDT, has clarified that for the purpose of determining rebate under Section 87A for resident individuals opting for the new tax regime under Section 115BAC, income taxed at special rates - say, capital gains under Section 111A - would not be considered.
Practical Example (FY 2025-26)
Let's consider a practical scenario to understand the implications:
- Total Income: ₹11,00,000
- Salary Income (Normal Income): ₹9,00,000
- STCG u/s 111A: ₹2,00,000
- Tax on Salary Income (₹9,00,000): ₹45,000
- Rebate u/s 87A: ₹45,000 (since normal income is within ₹12,00,000)
- Tax on Salary after Rebate: ₹0
- Tax on STCG u/s 111A (₹2,00,000 @ 15%): ₹30,000
- Total Tax Payable (before Cess): ₹30,000
- Add: Health & Education Cess @ 4%: ₹1,200
- Net Tax Payable: ₹31,200
Key Takeaways
- Section 87A rebate is not available on STCG under Section 111A in the new tax regime
- The rebate only applies to 'normal' income taxed under the slab rates
- Taxpayers with significant capital gains should carefully evaluate their regime choice
- Always verify the latest tax rates and provisions as per the current financial year
Conclusion
The rebate limit under Section 87A is higher in the new tax system; however, one should note that this rebate does not normally apply to special rate income, such as STCG under Section 111A, upon opting for the new system from FY 2025-26 onward. This is an important difference for correct tax planning and computation. It is strongly advised that one consult a tax professional who can provide specific advice related to one's own financial situation.
