FY 25–26 Tax Planning: Rebate Rules and STCG under Section 111A (New Regime)

Tax Planning for FY 25–26 Understanding Rebate Rules and STCG under Section 111A (New Regime)

Summary: For FY 2025–26 under the new tax regime, the rebate under section 87A is available only to resident individuals whose total income excluding special-rate incomes does not exceed ₹12,00,000. The rebate equals the lower of (i) tax payable on normal income (excluding tax on special-rate income) or (ii) ₹60,000, and it is applied before surcharge and cess. Crucially, the rebate cannot be set off against special-rate incomes such as Short-Term Capital Gains (STCG) under section 111A or Long-Term Capital Gains under section 112A. However, the basic exemption limit of ₹4,00,000 can be adjusted against all incomes, including STCG, first against normal income and then the balance against STCG. STCG under section 111A is taxed at 20% (no indexation or threshold exemption), and Chapter VI-A deductions and marginal relief do not apply to special-rate income. Finance Act, 2025 clarifies that excluding special-rate income for the ₹12 lakh test enhances certainty and prevents denial of rebate on normal income.

Gazette of India notification number CG-DL-E-29032025-262125

Tax Planning for FY 25–26 Understanding Rebate Rules and STCG under Section 111A (New Regime)

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:

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

Or

b. 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. STCG u/s 111A:

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 (STCG) 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 @20% on STCG if shares are sold in the financial year 25-26.

d. There is no additional benefit available under this section. Unlike section 112A, where Long-Term Capital Gains up to 1,25,000 are exempt, no such exemption applies here.

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 (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 Short-Term Capital Gains (STCG) under section 111A.

b. It is a common misconception that STCG is always taxed at a fixed rate of 20%.

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

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 STCG.

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 STCG is always taxed at a fixed rate of 20%.

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

12. Practical scenario 3:

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

The total income for the purpose of rebate is 3,00,000**. Hence, rebate benefit can be applied against normal income only. The total tax liability of normal income is Nil.

The total tax liability on STCG is 20,000 instead of 40,000 & on which rebate benefit not available. Explained this via below presentation:

Hence, tax payable will be 20,000 on 1,00,000.

** While computing the total income for the purpose of rebate, special rates income shall be excluded. Hence in this case, total income is 3,00,000 instead of 5,00,000.

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 11,00,000**. It did not exceeds the 12,00,000. Hence, rebate benefit can be applied against normal income.

** 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 13,00,000. Therefore, assessee is eligible for rebate under new regime.

Tax payable on STCG is 40,000 which is not eligible for rebate.

14. Practical scenario 5:

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

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.

** 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 STCG of Rs. 12,00,000. Hence, in this case there will be tax liability on net amount i.e. 8,00,000 @20%.

15. Note:

c. The benefit of basic exemption limit can be applied to STCG u/s 111A. Firstly, it shall be used against normal income.

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

e. The benefit of rebate cannot be applied to STCG u/s 111A.

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

g. 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:

a. 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.

b. Also, the rebate benefit cannot be applied against such special rate income.

c. This results in a advantage to the assessee.

d. 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 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.

19. Refer to the article for Impact of Rebate on STCG us 111A for the FY 25-26 in old regime:

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

20. Refer to the article for Impact of Rebate on LTCG us 112A for the FY 25-26 in old regime:

https://taxguru.in/income-tax/tax-planning-fy-2025-26-rebate-rules-ltcg-section-112a-old-regime.html

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