The 2025 Budget has brought a significant revision to Section 87A, increasing the rebate threshold from ₹7 lakh to ₹12 lakh under the New Tax Regime. However, a critical restriction has been introduced—rebate no longer applies to tax on special rate income, such as capital gains and lottery winnings. This change has created new challenges for taxpayers, necessitating a careful review of its implications.
Changes in Section 87A: Before and After Budget 2025
Before Amendment (Up to FY 2024-25)
Resident individuals with a total income up to ₹7 lakh could claim a rebate of up to ₹25,000 under the New Tax Regime.
The rebate was not restricted for most special rate incomes except long-term capital gains (LTCG) on listed equity under Section 112A.
After Amendment in Budget 2025 (Applicable from FY 2025-26 onwards)
The rebate threshold has been increased to ₹12 lakh.
A new restriction has been introduced, disallowing rebates on tax from:
Capital Gains (Short-term and Long-term)
Dividend Income
Lottery Winnings
Betting and Game Show Prizes
The rebate is limited only to tax calculated on slab-rate income under Section 115BAC.
Comparison of Section 87A: Before and After Budget 2025
| Feature | Before Budget 2025 | After Budget 2025 |
|---|---|---|
| Rebate Limit | ₹7 lakh | ₹12 lakh |
| Applicable Tax Regime | New Tax Regime Only | New Tax Regime Only |
| Rebate on Capital Gains? | Allowed except for LTCG under 112A | Not Allowed |
| Rebate on Lottery/Betting Income? | Allowed | Not Allowed |
| Maximum Rebate | ₹25,000 | ₹50,000 |
| Rebate on Special Rate Income? | Yes, except LTCG under 112A | No, restricted to slab-rate income only |
Illustrative Examples
Example 1: Eligible for Full Rebate
A salaried individual earning ₹11.8 lakh under the New Tax Regime with no capital gains or special rate income will qualify for the full rebate of ₹50,000. Since all their income falls under the normal slab rates, they can fully utilize Section 87A.
Example 2: Partially Eligible for Rebate
A taxpayer with a salary of ₹10 lakh and short-term capital gains of ₹2 lakh has a total income of ₹12 lakh. Although their total income is within the rebate limit, the tax on the ₹2 lakh capital gain will not be eligible for the rebate. The rebate will apply only to the tax payable on ₹10 lakh under slab rates.
Example 3: Not Eligible for Rebate
A taxpayer earning ₹6 lakh from salary and ₹8 lakh from long-term capital gains will have a total income of ₹14 lakh. Even though their normal slab-rate income is below ₹12 lakh, their total income exceeds ₹12 lakh, making them ineligible for the rebate.
Implications and Tax Planning Strategies
With the restriction on special rate income, individuals need to carefully assess whether the New or Old Tax Regime is more beneficial. Here are some key considerations:
Assess Special Rate Income Impact: If a significant portion of your income comes from capital gains, dividends, or other special incomes, the Old Regime might offer better deductions and exemptions.
Utilizing Salary Structuring: Those close to the ₹12 lakh threshold should explore tax-efficient salary components to maximize rebate eligibility.
Strategic Capital Gains Planning: Investors can spread their capital gains over multiple financial years or use available exemptions to minimize taxable special rate income.
Comparing Old vs. New Regime: Given the complexity of Section 87A changes, it is crucial to evaluate tax liability under both regimes before making a final choice.
Conclusion
While the increase in the rebate limit to ₹12 lakh provides relief for salaried taxpayers and small businesses, the new restrictions on special rate income create challenges. Those with capital gains or special incomes must explore alternative tax planning strategies to minimize their tax burden. The choice between Old and New Tax Regimes has become more critical than ever, requiring a detailed analysis before filing returns.
