Section 87A rebate rule correction: No income tax till income of Rs 12.75 lakh for salaried individuals except this income

Economic Times

2 days ago

ET Online Salaried to pay no tax for income up to Rs 12.75 lakh except STCG income Section 87A tax rebate does not apply to special income like short term capital gains (STCG) under the new tax regime. So even if your salary income is below Rs 12.75 lakh, your entire STCG will be taxed at the applicable special rate without any benefit of Section 87A tax rebate. This change in rule for Section 87A tax rebate was announced by the finance minister in Budget 2025 and it is applicable from FY 2025-26.
Moreover, there was a mistake in the drafting of the Income Tax Act, 1961 for FY 2025-26 (AY 2026-27) prior to the August 2025 amendments, in regard to standard deduction. Specifically, the error was with clause (iii) of Section 115BAC(1A) of the Income Tax Act, 1961. In short, because of the enahanced standard deduction of Rs 75,000 as announced in Budget 2025, salaried taxpayers earning up to Rs 12.75 lakh were not required to pay any tax. However, this drafting error prevented salaried taxpayers from claiming only Rs 50,000 as standard deduction.
On a positive note, the government has corrected this drafting error by amending the Income Tax Act 1961, and now the standard deduction is back to being available for up to Rs 75,000, which means it applies to salary incomes up to Rs 12.75 lakh in the new tax regime. Finance Minister Nirmala Sitharaman said before Lok Sabha on August 13, 2025 "Providing clarity for the new Income Tax regime, where standard deduction of Rs. 75,000 will be clarified for salaried individuals."
Naveen Wadhwa, Vice President, Research and Advisory Division, Taxmann explains about the drafting error with standard deduction which is now fixed: '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. 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.' When do salaried taxpayers get Section 87A tax rebate Chartered Accountant Abhishek Soni, co-founder, Tax2Win, explains that from Budget 2025 (applicable FY 2025‑26/AY 2026‑27), Section 87A rebate can be availed as under: New regime: The rebate under the new regime has been raised to Rs 60,000 for resident individuals with taxable income upto Rs 12 lakh, but incomes taxed at special rates (STCG under 111A, LTCG under 112) will not be eligible for Section 87A rebate. The rebate applies only to slab‑rate income upto Rs 12 lakh.
The rebate under the new regime has been raised to Rs 60,000 for resident individuals with taxable income upto Rs 12 lakh, but incomes taxed at special rates (STCG under 111A, LTCG under 112) will not be eligible for Section 87A rebate. The rebate applies only to slab‑rate income upto Rs 12 lakh. Old regime: The tax rebate under the old regime will be the same as FY 2024-25, i.e., Rs 12,500 if total taxable income (including STCG) upto Rs 5 lakh. Soni explains: "Salaried taxpayers earning up to Rs 12.75 lakh would not have to pay taxes due to Rs 75,000 standard deduction and increased limit under Section 87A rebate in new tax regime. However, this increased limit will be applicable for ITR filing in FY 2025-26."
Also read: No tax for up to Rs 12.75 lakh income for salaried under new tax regime as Section 87A tax rebate hiked in Budget 2025
The explanatory memorandum to Budget 2025 said this: "From assessment year 2026-27 onwards, for an assessee, being an individual resident in India whose income is chargeable to tax under the sub-section (1A) of section 115BAC, it is proposed to,– Enhance the limit of total income for rebate in clause (a) and (b) of first proviso under section 87A, on which the income-tax is payable as per the rates of income-tax under sub-section (1A) of section 115BAC, from Rs 7,00,000 to Rs 12,00,000 and the limit of rebate in clause (a) of first proviso to section 87A from Rs 25,000 to Rs 60,000.
Rationalise the first proviso to section 87A by inserting a new proviso so as to provide 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.
Further, as mentioned above, such rebate of income-tax is not available on tax on incomes chargeable at special rates (for e.g.: capital gains u/s 111A, 112 etc.)."
Pg-13 of Budget 2025 explanatory memorandum
How the tax-free income structure under the new tax regime works Naveen Wadhwa, breaks down of how the tax-free income works under new tax regime:
The taxpayer earns a total taxable income, including salary, of Rs 12.75 lakh. He opts for the new tax regime under Section 115BAC. A standard deduction of Rs 75,000 is claimed (as per the new tax regime, which allows a higher deduction than the old tax regime). After the deduction, the taxable income stands at Rs 12 lakh. Tax payable on Rs 12 lakh is Rs 60,000, per the income tax slab rates under the new tax regime announced in the Budget 2025. The taxpayer claims the Section 87A tax rebate of Rs 60,000, reducing the net tax liability to nil. According to Wadhwa, these three provisions determine how tax-free income is determined: 1. Section 115BAC-The new tax regime The Finance Act, 2023, introduced Section 115BAC(1A), which provides revised income tax slab rates for taxpayers who opt for the new tax regime. It classifies rates under three clauses:
Clause (i): Applicable for financial year 2023-24
Applicable for financial year 2023-24 Clause (ii): Applicable for financial tear 2024-25
Applicable for financial tear 2024-25 Clause (iii): Applicable from financial year 2025-26(inserted via the Finance Act, 2025). Wadhwa says: "These income tax slab rates define the taxation framework for a particular financial year under which a taxpayer's income is computed." 2. Tax Rebate under Section 87A To ease the tax burden, the Finance Act, 2025 increased the Section 87A tax rebate, raising the threshold for tax-free income from Rs 7 lakh to Rs 12 lakh. Consequently, tax liability for incomes up to Rs 12 lakh is effectively reduced to zero. 3. Standard deduction under Section 16 A critical component of the tax-free income computation is the standard deduction. Initially, the deduction for salaried employees was Rs. 50,000, but the Finance (No. 2) Act 2024 introduced an enhanced deduction of Rs. 75,000 under a new proviso to Section 16(ia) under the new tax regime.