Budget 2025: Last week, Finance Minister Nirmala Sitharaman announced that there will be no taxes on normal income up to Rs 12 lakh starting from the financial year 2025-26 under the New Tax Regime. The Budget 2025 proposed that the tax-free income limit for salaried employees in the new regime will increase to Rs 12.75 lakh from the previous limit of Rs 7.75 lakh.
It is important to note that the statement by the finance minister regarding no tax payable on income up to Rs 12 lakh does not indicate an increase in the basic exemption limit to Rs 12 lakh in the new regime.
How much tax do I have to pay? Calculate now
This is due to the provision of a rebate under Section 87A of the Income Tax Act. Under this section, taxpayers with a net taxable income of up to Rs 5 lakh in the old tax regime and up to Rs 7 lakh in the new tax regime were eligible for a tax rebate of Rs 12,500 and Rs 25,000 respectively. Therefore, the proposed hike in the tax-free income limit under the new regime is a result of the tax rebate and revised tax slab and rates.
Rebate under Section 87A
In accordance with the proposed Finance Bill 2025, the rebate under Section 87A is now applicable up to a total income of Rs 12 lakh. This essentially means that individuals can avail a rebate on their tax liability of up to Rs 60,000. This rebate is based on the new tax slabs and corresponding rates.
Under the new provisions, if the tax payable amounts to Rs 60,000 or lower for a total income of Rs 12,00,000 or lower, individuals can avail of the rebate, reducing their tax liability to zero.
It is worth noting that previously, the rebate was only available for total incomes up to Rs 7 lakh under the new tax regime and Rs 5 lakh under the old tax regime.
“There has been a significant change in the applicability of the Section 87A rebate to capital gains following the Union Budget 2025. Currently, under the new tax regime, resident individuals with a total income up to Rs 7 lakh are eligible for a rebate of Rs. 25,000 under Section 87A. However, the Budget 2025 has proposed to enhance this rebate for the financial year 2025-26 (assessment year 2026-27), increasing the rebate limit to Rs. 60,000 for individuals with a total income up to Rs. 12 lakh,” said CA Suresh Surana.
He added: “Following the Budget 2025 clarification, the Section 87A rebate is uniformly inapplicable to both short-term and long-term capital gains taxed at special rates. Taxpayers should plan their investments and tax strategies accordingly, considering that the rebate can no longer be utilized to offset tax liabilities arising from these types of capital gains.”
Incomes that are not included in Section 87A
Budget 2025 proposes to include only income that is not taxed at special rates. Capital gains and income from lotteries are examples of income that will not be considered in the income computation for Section 87A. This means that if an individual’s income includes capital gains taxed at special rates, they will not be able to claim the Section 87A rebate against the tax payable on those gains.
For instance, if an individual has a total income of Rs. 13 lakh that includes Rs. 3 lakh from long-term capital gains (LTCG), only the portion of income that falls under regular slab rates will be eligible for the rebate. The LTCG would be taxed at 12.5% after considering exemptions, and the individual would still owe taxes on that amount despite their total income being above the rebate threshold.
“After the Budget 2025, the Section 87A rebate would not apply to Income from capital gains, lotteries, and other categories taxed at special rates is explicitly excluded from the Section 87A rebate. Thus, taxpayers should be mindful that while they can benefit from the increased rebate for regular income, they will still face tax liabilities on capital gains and other special rate incomes, necessitating careful tax planning,” Surana said.
In FY2023-24, the Income Tax department’s ITR filing utility reportedly removed the Section 87A tax rebate for individuals using the new tax regime starting July 5, 2024. The rebate was not available in certain scenarios, including when special tax rates were applied, such as 15% on short-term capital gains or 10% on long-term capital gains from the sale of equity shares or equity-oriented mutual funds.”
If Section 87A is inapplicable…
If the Section 87A rebate no longer applies to capital gains, small taxpayers may explore the following alternative tax-saving options to reduce their tax liabilities:
Ø Section 54 (For Residential Property Sellers) – Exemption on capital gains from the sale of a house if reinvested in another residential property within the prescribed time.
Ø Section 54EC (Capital Gains Bonds) – Long-term capital gains from the sale of land or building can be invested in specified bonds (e.g., RECL, PFCL) within six months, subject to a limit of Rs. 50 lakh.
Ø Section 54F (For Sale of Any Capital Asset Except Residential Property) – Full exemption on long-term capital gains if the proceeds are used to purchase a new residential house, subject to conditions.