Here is the bottom line before we go any further: for FY 2025-26 (AY 2026-27) you cannot use the Section 87A rebate to wipe out the tax on your capital gains that are taxed at special rates — neither short-term gains on equity under Section 111A nor long-term gains on equity under Section 112A. If your salary or business income is small enough, the rebate will still zero out the tax on that portion. But the tax on your listed-share gains stands on its own, and you pay it in full.
This trips up a lot of otherwise careful filers, because for a couple of years the position genuinely was murky and the income-tax utility itself kept changing its mind. The Finance Act 2025 has now settled it — against the taxpayer. This article walks through what changed, what is still allowed, and a worked example so you can see exactly where the tax lands.
The short answer for FY 2025-26
Section 87A gives a resident individual a rebate on the tax payable, provided total income stays within a threshold. Under the new regime for FY 2025-26 the rebate is up to Rs. 60,000 where total income does not exceed Rs. 12,00,000. Under the old regime it remains up to Rs. 12,500 where total income does not exceed Rs. 5,00,000.
The catch is what the rebate can be set against. From FY 2025-26 it can only reduce the tax computed on income taxed at ordinary slab rates — salary, business income, interest, rent and the like. It cannot reduce the flat-rate tax on:
- STCG under Section 111A — short-term gains on listed equity shares and equity mutual funds, taxed at 20% (for transfers on or after 23 July 2024).
- LTCG under Section 112A — long-term gains on the same assets, taxed at 12.5% on the amount above the Rs. 1,25,000 annual exemption.
So the mental shortcut “my total income is below Rs. 12 lakh, therefore my tax is nil” is wrong the moment special-rate capital gains are in the mix.
What the Finance Act 2025 actually changed
To understand why filers are confused, you have to know the recent history. Until the return-filing utility was quietly amended in July 2024, the department’s own software allowed the 87A rebate to run against STCG under 111A. Many taxpayers claimed it and paid nothing. The utility then stopped allowing it, demand notices went out, the Bombay High Court got involved on a public-interest petition, and the ITAT (notably a Ahmedabad bench) held in favour of taxpayers for AY 2024-25 — reasoning that Section 111A did not itself carry a bar, unlike Section 112A which expressly denies the 87A rebate on equity LTCG.
That distinction — STCG yes, LTCG no — was the technically defensible reading for the earlier years, and it is exactly why you will still find it repeated online. But the Finance Act 2025 closed the door by inserting a proviso to Section 87A restricting the rebate to the tax on income other than that charged at special rates. In plain terms, for FY 2025-26 onwards the rebate is capped at the tax on your slab-rate income, and special-rate capital gains are carved out completely. The old “STCG is different” argument no longer helps for the current year.
The benefit people confuse with the rebate: basic exemption adjustment
There is a separate, real relief that filers often mistake for the 87A rebate — the adjustment of the unexhausted basic exemption limit against capital gains. A resident individual whose other income is below the basic exemption limit can set the shortfall against STCG (111A) and LTCG (112A).
Take a retired person under the new regime whose only income for FY 2025-26 is STCG of Rs. 3,00,000 on shares. The basic exemption is Rs. 4,00,000. Since there is no other income eating into it, the entire Rs. 3,00,000 of STCG is covered by the exemption limit and the tax is nil — not because of any 87A rebate, but because the gain never crossed the exemption floor. This is genuine and worth using; just do not confuse it with the rebate, which cannot touch special-rate income at all.
A worked example — where the trap bites
Consider Mr. Rao, a resident salaried employee, filing under the new regime for FY 2025-26:
| Particulars | Amount (Rs.) |
|---|---|
| Salary income (after standard deduction) | 8,00,000 |
| STCG u/s 111A (listed equity, 20%) | 2,00,000 |
| LTCG u/s 112A (listed equity) | 1,50,000 |
| Total income | 11,50,000 |
| Tax computation | |
| Tax on salary at slab rates (5% of Rs. 4,00,000) | 20,000 |
| Less: Section 87A rebate (limited to tax on slab income) | (20,000) |
| Tax on salary after rebate | Nil |
| Tax on STCG (20% × Rs. 2,00,000) | 40,000 |
| Tax on LTCG (12.5% × [Rs. 1,50,000 − Rs. 1,25,000]) | 3,125 |
| Tax before cess | 43,125 |
| Add: Health & education cess at 4% | 1,725 |
| Total tax payable | 44,850 |
Mr. Rao’s total income is Rs. 11,50,000 — comfortably below the Rs. 12,00,000 rebate threshold. The trap is assuming that means zero tax. In fact the rebate only erases the Rs. 20,000 on his salary; the Rs. 40,000 on his short-term gains and Rs. 3,125 on his long-term gains survive, and he owes roughly Rs. 44,850. If you want to see how your own mix of salary and gains behaves, model it with our Income Tax Calculator and cross-check the gains figure with our Capital Gains Tax Calculator.
The old regime position
The old regime was never generous here to begin with. The Rs. 12,500 rebate applies only where total income is up to Rs. 5,00,000, and it too runs only against tax on slab-rate income — the tax on 111A and 112A gains was always outside its reach. The unexhausted basic exemption adjustment (Rs. 2,50,000 for those below 60) works the same way as in the new regime. So whichever regime you are in for FY 2025-26, the rule to remember is identical: the 87A rebate does not shelter special-rate capital gains. If you are still deciding between regimes, our Advanced Income Tax Calculator lets you compare the two side by side.
Key takeaways
- For FY 2025-26, Section 87A rebate is not available against STCG under 111A or LTCG under 112A, in either the old or the new regime.
- The rebate still zeroes out tax on your slab-rate income — up to Rs. 60,000 (new regime, income up to Rs. 12 lakh) or Rs. 12,500 (old regime, income up to Rs. 5 lakh).
- The Finance Act 2025 added a proviso ending the earlier “STCG yes, LTCG no” debate; the ITAT rulings that allowed STCG rebate related to AY 2024-25 and do not help for the current year.
- A separate relief — setting your unexhausted basic exemption limit against capital gains — is real and often confused with the rebate. Use it, but know the difference.
- Do not assume “total income below the threshold” means “no tax” when equity gains are involved. Compute the special-rate tax separately.
Frequently Asked Questions
Can I claim the Section 87A rebate on short-term capital gains for FY 2025-26?
No. Following the Finance Act 2025 amendment, the rebate is limited to the tax on your slab-rate income. Tax on STCG under Section 111A (20%) is charged separately and the rebate cannot reduce it, even if your total income is within the Rs. 12 lakh threshold.
But didn’t a tribunal rule that STCG gets the rebate?
Those ITAT decisions concerned AY 2024-25, when Section 111A carried no express bar. The Finance Act 2025 has since inserted a proviso that restricts the rebate to non-special-rate income, so those rulings do not assist claims for FY 2025-26 onwards.
Is the rebate available on long-term capital gains on equity?
No. LTCG under Section 112A has long been outside the 87A rebate, and remains so. You do, however, get the separate Rs. 1,25,000 annual exemption on such gains before the 12.5% rate applies.
My only income is Rs. 3.5 lakh of share gains — do I pay tax?
As a resident, you can set your unexhausted basic exemption limit (Rs. 4,00,000 in the new regime) against those gains. The gains within the exemption limit are not taxed. This is the basic-exemption adjustment, not the 87A rebate — a different provision that happens to help low-income filers.
Does the rebate reduce the tax on my salary if I also have capital gains?
Yes. The rebate still applies to the tax on your slab-rate income (salary, interest, business income), provided your total income is within the threshold. It simply cannot extend to the tax on your special-rate capital gains.