No income tax rebate under Section 87A even if income is less than Rs 7 Lakh under new tax regime in this situation, point out CAs

Aug 11, 2025

Synopsis
Chartered Accountants have raised concerns about the denial of Section 87A tax rebates to eligible taxpayers with special rate incomes like STCG under the new tax regime. While a Budget 2025 amendment restricts this rebate on special incomes from FY 2025-26, the ITR utility is already denying it for FY 2024-25, causing confusion and additional tax burdens. Read more.

Chartered Accountant Abhas Halakhandi, writing on X (formerly known as Twitter) has recently brought attention to a concern regarding the denial of the Section 87A tax rebate to eligible taxpayers. Section 87A rebate is applicable to taxpayers with an annual income of up to Rs 7 lakh under new tax regime and Rs 5 lakh under the old tax regime. When the Section 87A tax rebate is applied, the net tax liability becomes nil. However, Halakhandi and other chartered accountants have highlighted on social media that it is not being given to eligible taxpayers if they have any special rate incomes like short term capital gains (STCG) under the new tax regime.

In this context, it is important to mention that the Section 87A tax rebate is not applicable to special rate income as per the amendment introcuded in Budget 2025, which will take effect from FY 2025-26 (AY 2026-27) onwards. The concern raised by chartered accountants is that the Section 87A rebate on special rate incomes is also not being granted for FY 2024-25 (AY 2025-26).

Halakhandi said on X (formerly Twitter on August 4, 2025): “Section 87A Rebate – Restriction applied even before it became law? From FY 2025-26, 87A rebate in the new regime won’t apply on special rate income (like LTCG, STCG @111A)—as per new proviso inserted by Finance Act 2025. But taxpayers are paying additional taxes & being denied this rebate in FY 2023-24 and 2024-25 — even though the restriction wasn’t in force! Only in Indian taxation- future law enforced for past years!!”

What is the issue with Section 87A tax rebate?

According to chartered accountant Abhishek Soni, co-founder, Tax2Win: “Only resident individuals can claim the rebate under Section 87A. You are eligible for this rebate if your total income does not exceed:

Rs 7 lakh under the new tax regime, (Rs 25,000 is the maximum rebate), OR

Rs 5 lakh under the old tax regime (Rs 12,500 is the maximum rebate).

The rebate amount will be the lower of:

The actual tax payable (before cess), or

The maximum limit specified under Section 87A.”

Soni says: “You cannot apply this rebate against tax payable on long-term capital gains taxed under Section 112A. Starting FY 2025–26, the rebate will no longer apply to income taxed at special rates.”

Neeraj Agarwala, Partner, Nangia & Co LLP, says:

“For AY 2025–26, Section 87A provides a tax rebate based on the taxpayer’s total income, which is the aggregate of income under all heads (after deductions). Under the old tax regime, the rebate is available if total income is up to Rs 5 lakh, with a maximum rebate of Rs 12,500. Under the new tax regime, the threshold is Rs 7 lakh, with a rebate of up to Rs 25,000.”

“However, as per Section 112A, if a taxpayer's total income includes long-term capital gains (LTCG), the rebate under Section 87A is allowed only after deducting the tax payable on such LTCGs. It’s important to note that this limitation is specifically provided under Section 112A for LTCGs, and is not extended to other types of income, such as short-term capital gains (STCG) or income under any other head.”

ITR utility not allowing Section 87A on special rate incomes

Soni shares his personal experience while filing ITRs for AY 2025–26 (FY 2024–25). Soni says,” the treatment of Section 87A rebate on special rate income is as follows:

New tax regime: “The ITR utility does not allow automatic 87A rebate when the total income exceeds Rs 7 lakh includes special rate income like STCG under Section 111A or LTCG under Section 112A. The rebate can only be claimed if the slab-rate income alone is within the Rs 7 lakh limit. So, 87A rebate is not allowed on special rate income under the new regime, as per both the law and portal behavior.”

Old regime: “The 87A rebate of Rs 12,500 is allowed even when the income includes special rate income like STCG (111A) or LTCG (112A), as long as the total taxable income (including such income) does not exceed Rs 5 lakh. The rebate is automatically applied in most cases by the ITR utility.”

Agarwala from Nangia & Co LLP, says: “The Excel utility for filing Income Tax Returns for AY 2025–26 includes a comment stating that “Rebate under Section 87A will be available only on income taxable at normal rates, i.e., after excluding income taxed at special rates under the new tax regime. As these return forms are newly introduced, taxpayers should await further clarification from the Income Tax Department or the implementation of the High Court order before filing their income tax return.”

What is the problem with Section 87A rebate for FY 2024-25?

Post July 5, 2024, the income tax return (ITR) filing utilities were not allowing the Section 87A rebate for various special rate incomes, including short-term capital gains on equity shares or equity-oriented mutual funds, taxable at 15% under Section 111A. This issue seems to have persisted till now.

Soni says: “Under the new tax regime for Incomes taxed at special rates, such as STCG under Section 111A (15%) and LTCG under Section 112A (10%), are excluded from the rebate calculation. As a result, if your income includes such capital gains and pushes your total income beyond Rs 7 lakh, or if your income solely comprises special-rate capital gains, you won’t be eligible for the rebate under Section 87A in the new regime.”

What about the old tax regime?

Soni explains: “Under the old tax regime, the rebate under Section 87A is available if total taxable income, including income from salary, interest, house property, short-term capital gains (STCG under Section 111A), and other sources, does not exceed Rs 5 lakh. Under the old regime, Short-term capital gains (STCG) are taxes under section 111A. It is included in the income while calculating Rs 5 lakh threshold. However, long-term capital gains (LTCG) taxable under Section 112A are not eligible for rebate under Section 87A, even if the total income remains within the limit.”

On which incomes you can get 87A rebate for AY 2026-27 (FY 2025-26)?

Chartered Accountant Prakash Hegde explains: "For FY 2025-26, Rebate under section 87A is available to an Individual Resident in India as under:

Under the Old Personal Tax Regime (‘OPTR’) – Up to Rs 12,500 if his Total Income is not more than Rs 5 Lakh.

Under the New Personal Tax Regime (‘NPTR’) – Up to Rs 60,000 if his Total Income is not more than Rs 12,70,500.

Due to an amendment made now, this rebate is available only for tax computed on taxable income under the NPTR but not on tax computed at the special rates of tax e.g.

long-term capital gains,

short term capital gains from equity share/mutual fund,

lottery winnings,

winnings from online games, etc.

[The Economic Times]