Section 87A Rebate: Is Income Up To Rs 12.75 Lakh Entirely Tax Free For Salaried? Check This Exception
Any gains from capital assets will attract LTCG and STCG taxes at a special rate irrespective of a salaried taxpayer's income.
Under the new tax regime, the government provided tax relief to salaried taxpayers earning up to Rs. 12 Lakh annually, with an additional Rs 75,000 standard deduction. Under the new tax regime, as announced in Budget 2025-26, for the salaried taxpayers, an annual income up to Rs 12.75 lakh becomes entirely tax-free.
The Finance Act, 2025, has introduced major changes to the tax rebate under Section 87A as announced in the Union Budget. Under Section 87A of the Income Tax Act, 1961, the tax-free income limit was extended to Rs 12 lakh from Rs 7 lakh earlier.
However, the Section 87A rebate will not apply to incomes taxed at special rates, such as short-term capital gains (STCG) and long-term capital gains (LTCG).
Even if a salaried taxpayer's income remains below the 12.75 lakh exemption limit, the entire STCG or LTCG in FY 2025-26 will be taxed at the applicable special rate without any benefits provided under Section 87A.
In the Finance Act, 2025, the government has amended clause (iii) of Section 115BAC(1A) of the Income Tax Act, 1961. Announced in the Budget 2025, the incorporation of an enhanced standard deduction of Rs 75,000 meant that taxpayers earning up to Rs 12.75 lakh were not liable to pay any tax. But the drafting error in the act prevented salaried taxpayers from claiming and bringing the standard deduction down to Rs 50,000.
'Providing clarity for the new Income Tax regime, where standard deduction of Rs. 75,000 will be clarified for salaried individuals," said Indian Finance Minister Nirmala Sitharaman regarding the amendment in the Lok Sabha on August 13.
As reported by the Economic Times, Taxmann Vice President, Research and Advisory Division, Naveen Wadhwa, highlighted the importance of the move.
'I had pointed out that proviso to Section 16(ia) gave a reference to clause (ii) of section 115BAC(1A), which applies to the assessment year 2025-26, but did not mention clause (iii), which governed the assessment year 2026-27," Wadhwa was quoted as saying by ET.
'Due to this omission, the enhanced standard deduction of Rs. 75,000 under the new tax regime failed to be available for the current financial year 2025-26. However, in the latest Taxation Laws (Amendment) Bill, 2025, as passed by the Parliament, this drafting error is fixed," he added.
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August 13, 2025, 18:56 IST
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