Tax Planning for FY 2025–26: Rebate & LTCG under Section 112A (Old Regime)

Tax Planning for FY 2025–26: Understanding Rebate Rules and LTCG under Section 112A (Old Regime)

The article explains how rebate under Section 87A applies when an individual resident earns income taxed at special rates—such as Short-Term Capital Gains under Section 111A or Long-Term Capital Gains under Section 112A—under the old tax regime for FY 2025-26. It clarifies that eligibility for the rebate depends on total income not exceeding ₹5 lakh, and that total income includes special-rate incomes for this threshold test. However, the rebate cannot be adjusted against tax payable on special-rate income; it is restricted to tax on normal income, subject to a maximum of ₹12,500. The article also highlights that the basic exemption limit of ₹2.5 lakh can be adjusted against capital gains after first being set off against normal income, often resulting in nil tax in lower-income scenarios. Through practical illustrations, it demonstrates common misconceptions—particularly that LTCG is always taxed at a fixed rate—and explains marginal relief where income marginally exceeds ₹5 lakh. It concludes that post-Finance Act, 2025, inclusion of special-rate income for rebate eligibility without allowing adjustment creates planning challenges under the old regime. 

1. Coverage of the article:

a. In this article, I am discussing whether a person who has earned income taxable at special rates (such as Short-Term Capital Gains under section 111A or Long-Term Capital Gains under section 112A), either alone or in combination with normal income, can avail the benefit of rebate.

b. I will also explain how the rebate amount is computed in cases where both types of incomes are earned under the old tax regime for the Financial Year 2025-26.

2. Rebate u/s 87A:

Rebate under this section can be availed if total income of the assessee for the financial year 25-26 is not exceeds Rs. 5,00,000.

3. Rebate calculation:

Tax payable on total income excludes the tax on special rate income

Or

Rs 12,500 (it is a fixed amount u/s 87A)

Whichever is lower

4. How to calculate tax payable for rebate:

a. Tax is calculated on the total income without considering the surcharge & cess for the purpose of determining the rebate.

b. Surcharge & cess are levied after deducting the rebate amount.

5. Eligible taxpayers:

a. Only individual resident can avail the benefit of this section irrespective of the age.

b. Non-resident individuals, firms or corporates etc. are not eligible to avail the benefit of this section.

6. Computation of total income:

a. For the purpose of this section, total income shall be considered inclusive of special rate income i.e STCG u/s 111A or LTCG u/s 112A or other types of special rate incomes.

b. If total income including special rate income does not exceed 5,00,000, the benefit of rebate can be availed.

7. Rebate for special rate income:

The benefit of rebate cannot be applied against special rate income.

8. LTCG u/s 112A:

a. This section covers capital gain on the sale of listed shares or equity oriented mutual funds etc.

b. If securities are sold after 12 months, the resulting gain or loss will be treated as Long-Term Capital Gain (LTCG) or loss. If they are sold within 12 months, such transactions will not fall under this section; instead, they will be covered under section 111A.

c. Tax rate:

The tax will be levied @12.5% on LTCG if shares are sold in the financial year 25-26.

d. There is an additional benefit available under this section. Under this section, where Long-Term Capital Gains up to 1,25,000 are exempt.

e. No indexation benefit is available for LTCG.

9. Basic exemption limit:

a. Under the old tax regime, the basic exemption limit is 2,50,000 for individuals below 60 years of age.

b. This benefit of the basic exemption limit applies to all types of income, including salary, interest, house property income, Short-Term Capital Gains (STCG), and Long-Term Capital Gains (LTCG).

10. Practical scenario 1:

Suppose the income of Mr. Ganesh for the FY 25-26 is:

a. In this case, the tax liability will be nil because the benefit of the basic exemption limit can be adjusted against Long-Term Capital Gains (LTCG) under section 112A.

b. It is a common misconception that LTCG is always taxed at a fixed rate of 12.5%.

c. In such scenario, there will be no tax liability on LTCG.

11. Practical scenario 2:

Suppose the income of Mr. Ganesh for the FY 25-26 is:

a. Firstly, the benefit of basic exemption limit will be given against normal income after that remaining amount can be utilized against LTCG.

b. The tax liability will be zero in this case because the benefit of the basic exemption limit can be applied against both incomes.

c. It is a common misconception that LTCG is always taxed at a fixed rate of 12.5%.

d. In such scenario, there will be no tax liability on LTCG.

12. Practical scenario 3:

Suppose the income of Mr. Ganesh for the FY 25-26 is:

a. Firstly, the benefit of basic exemption limit will be given against normal income after that remaining amount can be utilized against LTCG.

b. The tax liability will be zero in this case because the benefit of the basic exemption limit can be applied against both incomes.

c. It is a common misconception that LTCG is always taxed at a fixed rate of 12.5%.

d. In such scenario, there will be no tax liability on LTCG.

e. Out of total LTCG, 1,25,000 is exempt u/s 112A. Net taxable income after exemption comes to 2,50,000 & benefit of basic exemption limit is fully utilized against the balance LTCG.

f. Hence, there is no tax payable.

13. Practical scenario 4:

Suppose the income of Mr. Ganesh for the FY 25-26 is:

The total income for the purpose of rebate is 6,40,000**. It exceeds the 5,00,000. Hence, rebate benefit cannot be applied against normal income.

** While computing the total income for the purpose of rebate, special rates income is also included in total income. Hence in this case, total income is 6,40,000.

14. Practical scenario 5:

Suppose the income of Mr. Ganesh for the FY 25-26 is:

a. The total income for the purpose of rebate is 5,25,000**.

b. It exceeds the 5,00,000. Hence, rebate benefit cannot be applied against normal income.

** While computing the total income for the purpose of rebate, special rates income is also included in total income. Hence in this case, total income is 5,25,000.

a. Out of total LTCG, 1,25,000 is exempt u/s 112A. Net taxable income after exemption comes to zero.

b. Hence, there is no tax payable on LTCG.

15. Important note for above scenario:

a. In the case of LTCG, there will be no tax liability on 1,25,000. However, while computing total income, full amount of LTCG must be shown in “Capital Gain”

b. The net amount will not be shown in this head.

c. Kindly note this point for the purpose of tax planning. In 5^th scenario, there will be a tax liability of 7,500 instead of nil.

16. Note:

a. The benefit of basic exemption limit can be applied to LTCG u/s 112A. Firstly, it shall be used against normal income.

b. For calculating total income u/s 87A includes the special rate incomes after Budget 2025.

c. The benefit of rebate cannot be applied to LTCG u/s 112A.

d. The benefit of Ch. VI (A) deductions is not allowed against special rate incomes.

e. Marginal relief cannot be applied against special rate incomes.

17. Marginal relief Ist case:

If the assessee income exceeds 5,00,000, rebate will not be available, but marginal relief may apply.

a. When the assessee income is up to 5,00,000, the tax liability is nil. However, if the income is 5,10,000, the total tax liability comes to 14,500. Here, the income has increased by only 10,000 above 5,00,000, but the tax liability has increased by 14,500. In such cases, tax liability will be restricted to the amount by which total income exceeds 5,00,000.

Therefore, the tax liability will be 10,000.

18. Marginal relief 2^nd case:

When the assessee’s income is 5,30,000, the total tax liability comes to 18,500. Here, the income has increased by 30,000, and the tax liability has increased by only 18,500, which is lower than the excess income. In such a case, the benefit of marginal relief does not apply.

Therefore, the tax liability will be 18,500.

19. Amendment via Finance Act, 2025:

a. Specifically, under the old tax regime, while computing total income, special rate incomes (such as capital gains) are included for determining the 5,00,000 limit. However, the rebate benefit cannot be applied against such special rate income.

b. This results in a disadvantage to the assessee, since including these incomes affects eligibility without allowing rebate adjustment.

c. In contrast, the new tax regime provides a separate provision for this situation, which I will explain in a separate article.

20. Bare Act of Section 87A:

Rebate of income-tax in case of certain individuals

An assessee, being an individual resident in India, whose total income does not exceed five hundred thousand rupees, shall be entitled to a deduction, from the amount of income-tax (as computed before allowing the deductions under this Chapter) on his total income with which he is chargeable for any assessment year, of an amount equal to hundred per cent of such income-tax or an amount of twelve thousand and five hundred rupees, whichever is less:

Provided that where the total income of the assessee is chargeable to tax under sub-section (1A) of section 115BAC, and the total income—

a. does not exceed ³[seven] hundred thousand rupees, the assessee shall be entitled to a deduction from the amount of income-tax (as computed before allowing for the deductions under this Chapter) on his total income with which he is chargeable for any assessment year, of an amount equal to one hundred per cent of such income-tax or an amount of ⁴[twenty-five] thousand rupees, whichever is less;

b. exceeds ³[seven] hundred thousand rupees and the income-tax payable on such total income exceeds the amount by which the total income is in excess of ³[seven] hundred thousand rupees, the assessee shall be entitled to a deduction from the amount of income-tax (as computed before allowing the deductions under this Chapter) on his total income, of an amount equal to the amount by which the income-tax payable on such total income is in excess of the amount by which the total income exceeds seven hundred thousand rupees.]

Following second proviso shall be inserted after the proviso to section 87A by the Finance Act, 2025, w.e.f. 1-4-2026:

Provided further that the deduction under the first proviso, shall not exceed the amount of income-tax payable as per the rates provided in sub-section (1A) of section 115BAC.

21. Refer this article for Tax on STCG us 111A & impact of Rebate us 87A FY 25-26 Old regime:

https://taxguru.in/income-tax/section-87a-rebate-stcg-111a-tax-planning-fy-2025-26.html

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If you have any queries, you can reach the author by email at caashishsingla878@gmail.com.

Disclaimer: The views and opinions expressed in this article are those of the author. This article is intended for general information purposes only and does not constitute professional advice. Readers are strongly advised to consult a qualified professional for guidance specific to their individual situation before making any financial, legal, or tax-related decisions. The author shall not be held liable for any loss or damage of any kind incurred as a result of the use of this information or for any actions taken based on the content of this article.