Many taxpayers expected income up to ₹12 lakh to be tax-free under Budget 2025 changes. However, not all cases qualify for zero tax. Special rate incomes, such as capital gains, do not get the benefit of the Section 87A rebate.

How Section 87A works

Under the new tax regime, individuals earning up to ₹12 lakh can claim a full tax rebate under Section 87A.

This effectively makes income tax-free for salaried individuals, considering a ₹75,000 standard deduction.

When you still have to pay tax

If part of your income is taxed at special rates, the rebate will not cover that portion.

Example 1: Short-Term Capital Gains

Suppose your total income is ₹12 lakh:

• ₹8 lakh comes from salary and other sources.
• ₹4 lakh comes from short-term capital gains (STCG) on stocks or mutual funds.

In this case, the Section 87A rebate applies only to the ₹8 lakh salary income. However, the ₹4 lakh STCG is taxed separately at 20%, meaning you will pay ₹80,000 in taxes.

Example 2: Long-Term Capital Gains

If the ₹4 lakh income is from long-term capital gains (LTCG) on listed equities:

The first ₹1.25 lakh is exempt.

The remaining ₹2.75 lakh is taxed at 12.5%, resulting in ₹34,375 tax.

Key takeaways

Salaries up to ₹12 lakh are tax-free under Section 87A, but special rate incomes are excluded.

Short-term capital gains are taxed at 20%, and long-term capital gains on equities are taxed at 12.5% after exemptions.

Taxpayers earning capital gains must plan accordingly, as they won’t get full exemption.

While the new tax regime offers relief to salaried taxpayers, those earning through investments should be aware of these exclusions.