Tax Planning for FY 2025–26 Understanding Rebate Rules and LTCG under Section 112A (New Regime)
This article explains how the rebate under Section 87A interacts with special rate incomes like Long-Term Capital Gains under Section 112A in the new tax regime for FY 2025–26. Resident individuals can claim a rebate if their total income, excluding special rate income, does not exceed ₹12 lakh. The rebate is limited to the lower of tax on normal income or ₹60,000, and it cannot be set off against LTCG taxed at special rates. LTCG on listed shares and equity mutual funds is taxed at 12.5% after an exemption of ₹1.25 lakh, without indexation. The basic exemption limit of ₹4 lakh can be adjusted first against normal income and then against LTCG. Through practical scenarios, the article clarifies that many taxpayers may have nil tax liability despite earning LTCG, while higher gains remain taxable. It also highlights marginal relief rules and recent amendments excluding special income for rebate eligibility.
1. Coverage of this 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 new 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. 12,00,000.
3. Rebate calculation:
Tax payable on total income excludes the tax on special rate income
Or
Rs 60,000 (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 under new regime, total income shall be considered exclusive 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 excluding special rate income does not exceed 12,00,000, 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
b. If securities are sold within 12 months, the resulting gain or loss will be treated as Short-Term Capital Gain (LTCG) or loss. If they are sold after 12 months, such transactions will not fall under this section; instead, they will be covered under section 112A.
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. Long-Term Capital Gains up to 1,25,000 are exempt but no such exemption applies in Section 111A.
e. There is no indexation benefit under this section.
9. Basic exemption limit:
a. Under the new tax regime, the basic exemption limit is 4,00,000 irrespective the age of the assessee.
b. This benefit of the basic exemption limit applies to all types of income, including salary, interest, house property income, Short-Term Capital Gains (LTCG), and Long-Term Capital Gains (LTCG).
10. Practical scenario 1:
Suppose the income of Mr. Ganesh for the FY 25-26 is:
| S. No | Particulars | Amount |
| 1 | Salary | – |
| 2 | Interest on FD | – |
| 3 | Saving bank Interest | – |
| 4 | LTCG u/s 112A | 4,00,000 |
| 5 | Gross total income | 4,00,000 |
| 6 | Less: Deductions | – |
| 7 | Total income | 4,00,000 |
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:
| S No | Particulars | Amount |
| 1 | Salary | 3,00,000 |
| 2 | Interest on FD | – |
| 3 | Saving bank Interest | – |
| 4 | LTCG u/s 112A | 2,00,000 |
| 5 | Gross total income | 5,00,000 |
| 6 | Less: Deductions | – |
| 7 | Total income | 5,00,000 |
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%. In such scenario, there will be no tax liability on LTCG.
** Remaining amount of basic exemption limit is utilized against LTCG. Net taxable amount of LTCG remains 1,00,000 & there is an exemption of 1,25,000 u/s 112A. Hence, there is no capital gain after these adjustments.
12. Practical scenario 3:
Suppose the income of Mr. Ganesh for the FY 25-26 is:
| S No | Particulars | Amount |
| 1 | Salary | 4,00,000 |
| 2 | Interest on FD | – |
| 3 | Saving bank Interest | – |
| 4 | LTCG u/s 112A | 1,25,000 |
| 5 | Gross total income | 5,25,000 |
| 6 | Less: Deductions | – |
| 7 | Total income | 5,25,000 |
a. The total income for the purpose of rebate is 4,00,000**. Hence, rebate benefit can be applied against normal income only.
b. The total tax liability of normal income is Nil.
c. The total tax liability on LTCG is Nil after adjustment of 1,25,000.
d. Explained this via below table:-
| S No | Particulars | Amount |
| 1 | Normal income | 4,00,000 |
| 2 | Basic exemption limit | 4,00,000 |
| 3 | Unexhausted BEL | – |
| 4 | LTCG | 1,25,000 |
| 5 | Exemption u/s 112A | 1,25,000 |
Hence, tax payable will be zero.
** While computing the total income for the purpose of rebate, special rates income shall be excluded. Hence in this case, total income is 4,00,000 instead of 5,25,000.
13. Practical scenario 4:
Suppose the income of Mr. Ganesh for the FY 25-26 is:
| S No | Particulars | Amount |
| 1 | Salary | 11,00,000 |
| 2 | Interest on FD | – |
| 3 | Saving bank Interest | – |
| 4 | LTCG u/s 112A | 3,25,000 |
| 5 | Gross total income | 14,25,000 |
| 6 | Less: Deductions | – |
| 7 | Total income | 14,25,000 |
The total income for the purpose of rebate is 11,00,000**. It did not exceeds the 12,00,000. Hence, rebate benefit can be applied against normal income.
| S No | Particulars | Amount |
| 1 | Tax on normal income | 50,000 |
| 2 | Rebate | 60,000 |
| 3 | Allowable rebate | 50,000 |
** While computing the total income for the purpose of rebate, special rates income shall be excluded. Hence in this case, total income is 11,00,000 instead of 14,25,000. Therefore, assessee is eligible for rebate under new regime.
Computation of tax on LTCG:
| S No | Particulars | Amount |
| 1 | LTCG | 3,25,000 |
| 2 | Exemption u/s 112A | 1,25,000 |
| 3 | Net amount | 2,00,000 |
| 4 | Tax on net figure | 25,000 |
a. Tax payable on LTCG is 25,000 which is not eligible for rebate.
b. While computing the total income, full amount of LTCG must be shown in Capital gain head instead of netting off it by 1,25,000. Hence, in this case, we must disclose the LTCG of 3,25,000 in Capital gain head instead of 2,00,000.
14. Practical scenario 5:
Suppose the income of Mr. Ganesh for the FY 25-26 is:
| S No | Particulars | Amount |
| 1 | Salary | – |
| 2 | Interest on FD | – |
| 3 | Saving bank Interest | – |
| 4 | LTCG u/s 112A | 12,00,000 |
| 5 | Gross total income | 12,00,000 |
| 6 | Less: Deductions | – |
| 7 | Total income | 12,00,000 |
The total income for the purpose of rebate is Nil**. It is not exceeding the 12,00,000. Hence, rebate benefit can be applied against normal income.
| S No | Particulars | Amount |
| 1 | Tax on normal income | – |
| 2 | Tax on LTCG | 84,375 |
| 3 | Total tax | 84,375 |
** While computing the total income for the purpose of rebate, special rates income shall be excluded. Hence in this case, total income is Nil.
Benefit of basic exemption limit can be applied against LTCG of Rs. 12,00,000. Hence, in this case there will be tax liability on net amount i.e. 6,75,000 @12.5%.
Computation of tax on LTCG:
| S No | Particulars | Amount |
| 1 | LTCG | 12,00,000 |
| 2 | Exemption u/s 112A | 1,25,000 |
| 3 | Basic exemption limit | 4,00,000 |
| 4 | Net amount | 6,75,000 |
| 4 | Tax on net figure | 84,375 |
While computing the total income, full amount of LTCG must be shown in Capital gain head instead of netting off it by 1,25,000. Hence, in this case, we must disclose the LTCG of 12,00,000 in Capital gain head instead of 10,75,000.
15. 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 excludes 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.
16. Marginal relief:
If the assessee’s income exceeds 12,00,000, rebate will not be available, but marginal relief may apply.
a. When the assessee’s income is up to 12,00,000, the tax liability is nil. However, if the income is 12,10,000, the total tax liability comes to 61,500. Here, the income has increased by only 10,000 above 12,00,000, but the tax liability has increased by 61,500. In such cases, tax liability will be restricted to the amount by which total income exceeds 12,00,000.
Therefore, the tax liability will be 10,000.
b. When the assessee’s income is 12,90,000, the total tax liability comes 73,500. Here, the income has increased by 90,000, and the tax liability has increased by 73,500, 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 73,500.
** Benefit of marginal relief only for the the normal income.
17. Amendment via Finance Act, 2025:
Specifically, under the new tax regime, while computing total income, special rate incomes (such as capital gains) are excluded for determining the 12,00,000 limit. Also, the rebate benefit cannot be applied against such special rate income. This results in a advantage to the assessee. In contrast, the old tax regime provides a separate provision for this situation, which I will explain in a separate article.
18. 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 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 twenty-five thousand rupees, whichever is less; | |
| (b) | exceeds 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 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.
19. Refer to the article for Impact of Rebate on STCG us 111A for the FY 25-26 in new regime:
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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.
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I am having 1000 shares of HDFC Bank as grandfathers category(holding as on 30thJanuary 2018) I want to gift the same to Non relative who is having Nil income(my friend) If after receiving gift within a month he sold entire shares. What is tax liability and how much tax he shall have to pay
Bihari, I have no idea about it.