Section 87A Rebate Won't Cover Your Capital Gains (AY 2026-27)
You booked some equity profits this year, your total income sits under ₹12 lakh, and you assumed the new regime's rebate wipes your tax to zero. For the return you file by 31 July 2026, it does not. Finance Act 2025 shut that door: the Section 87A rebate no longer touches capital gains. Your salary can be tax-free while your gains are taxed in the very same return. Here is the exact bill — and how to trim it before you file.
Summary
| Income in your return | Tax rate (FY 2025-26) | Shielded by the ₹12L rebate? |
|---|---|---|
| Salary & other normal income | 5%–30% slab | Yes — nil up to ₹12 lakh |
| Short-term equity gains — Sec 111A | 20% flat | No |
| Long-term equity gains — Sec 112A | 12.5% over ₹1.25 lakh/yr | No |
| Lottery, crypto & other special-rate income | 30% / varies | No |
Read that table as two separate tax bills stapled together. The left one can be zero; the right one is not, and the ₹12 lakh rebate only ever pays the left.
What actually changed for AY 2026-27
The rebate itself — Section 87A, up to ₹60,000
Under the new regime for FY 2025-26, if your total income is ₹12 lakh or less, Section 87A gives a rebate of up to ₹60,000 — exactly enough to make the tax on ₹12 lakh of normal income nil. Add the ₹75,000 standard deduction and a salaried person earning up to ₹12.75 lakh pays zero tax on salary.
Action: work out your total income — salary plus every rupee of capital gain — because gains count towards the ₹12 lakh line even though the rebate refuses to cover them.
The carve-out — Finance Act 2025
Section 87A now applies only to income taxed at slab rates. Tax computed on special-rate income — short-term equity gains under Section 111A and long-term equity gains under Section 112A — is explicitly left out. Even if your total income stays under ₹12 lakh, the rebate cannot be set off against that gains tax. The filing utility enforces it at AY 2026-27; there is no toggle to flip.
Action: compute the tax on your gains on its own line — 20% on 111A gains, 12.5% on 112A gains — and don't expect the rebate to erase it.
Your one free slice — the ₹1.25 lakh LTCG exemption
The only genuinely tax-free room on equity is the ₹1.25 lakh annual exemption on long-term gains under Section 112A. Gains up to that limit each financial year cost nothing; the 12.5% rate bites only on the excess. Short-term gains under Section 111A get no such exemption — 20% applies from the first rupee.
Action: if you hold long-term equity with unrealised gains and haven't used this year's ₹1.25 lakh, that headroom is the cheapest gain you will ever book.
Real example: Salaried, ₹11 lakh total income, Bengaluru
Ananya's taxable salary after the standard deduction is ₹9.5 lakh. She sold equity mutual funds during the year and booked ₹1.5 lakh of short-term gains. Total income: ₹11 lakh — comfortably under ₹12 lakh — so she assumed the rebate made her tax zero.
| Item | What she assumed | Actual, AY 2026-27 |
|---|---|---|
| Tax on salary (₹9.5L, slab) | ₹0 (rebate) | ₹0 (rebate) |
| Tax on STCG (₹1.5L @ 20%, Sec 111A) | ₹0 | ₹30,000 |
| Health & education cess (4%) | ₹0 | ₹1,200 |
| Total tax | ₹0 | ₹31,200 |
That ₹31,200 was always going to be due — the rebate never reached it. Now change one thing. Had she held those units past 12 months, the same profit would fall under Section 112A: ₹1.5 lakh minus the ₹1.25 lakh exemption, taxed at 12.5% — roughly ₹3,250 with cess. Same fund, same ₹1.5 lakh, about a tenth of the tax, decided entirely by holding period.
Earning ₹15 lakh-plus from salary alone? You never had the rebate to begin with — your gains sit on top at the same 20% and 12.5%, taxed from the first rupee past the LTCG exemption. And if you've parked equity in a lower-earning family member's name to save tax, their gains are caught by the identical rule.
What to do before 31 July
- Pull your capital gains statement. Download the broker or AMC capital gains report and reconcile it against the AIS on the tax portal. Tag each gain as 111A (short-term equity) or 112A (long-term equity) — rate and exemption both hinge on it.
- Tax the gains on their own line. Apply 20% to 111A gains and 12.5% to 112A gains above ₹1.25 lakh. Never fold them into the slab maths or wait for the ₹12 lakh rebate to absorb them.
- Set off eligible losses. Enter current-year and carried-forward capital losses so they cut these gains — short-term losses set off against both short- and long-term gains, long-term losses only against long-term gains (Sections 70 and 74). This is the one lever that legitimately shrinks the gains tax in your return.
- File by 31 July to keep loss carry-forward alive. Miss the date and you forfeit the right to carry unabsorbed capital losses forward (Section 139(3)), get pushed into the new regime by default, and pay a late fee of up to ₹5,000 under Section 234F.
The rule isn't going anywhere
Budget 2026 left the slabs and the rebate untouched for FY 2026-27, so this treatment carries straight into next year's planning. The takeaway is blunt: under the new regime, "income under ₹12 lakh means zero tax" is true for salary and false for capital gains. Size the two tax bills separately, and let holding period — not hope of a rebate — decide what you owe.
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