Income Tax Slabs, ₹12 Lakh Rebate & Exclusions of Special-Rate Incomes (FY 2025-26 / AY 2026-27) Comprehensive Guide for Indian Taxpayers, Investors & Professionals

Introduction

The Union Budget 2025 introduced significant reforms in personal taxation that apply for Assessment Year (AY) 2026-27 (Financial Year 2025-26). A major change is the enhanced Section 87A rebate, offering effective zero tax up to ₹12 lakh of taxable income under the new tax regime. However, not all income types are treated equally for this rebate — especially special-rate incomes like Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG). This blog explains:

• Updated income tax slabs and rates

• How the ₹12 lakh Section 87A rebate works

• Special-rate incomes excluded from rebate eligibility

• Practical examples and strategic insights

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1. New Income Tax Slab Rates for AY 2026-27

The new tax regime slabs for resident individuals (irrespective of age) are as follows (FY 2025-26 / AY 2026-27):

Health & Education Cess @ 4% is additionally applicable on tax computed.

This structure is under Section 115BAC (new regime) and is distinct from the old regime that allows exemptions and deductions like 80C, HRA, etc.

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2. Section 87A Rebate — Effective Zero Tax up to ₹12 Lakh

What Is Section 87A?

Section 87A provides a tax rebate to resident individuals, reducing their tax liability to zero if their taxable income under the new regime meets certain criteria. For AY 2026-27:

• A resident individual whose taxable income (after deductions) is ₹12 lakh or less is eligible for a rebate of up to ₹60,000 under Section 87A.

• This rebate is limited to the amount of tax payable (before cess).

💡 If your computed tax (before cess) under new regime slabs is ₹60,000 or less and your taxable income (excluding special-rate incomes) is within ₹12 lakh, your income tax becomes effectively zero after rebate (plus cess).

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3. Special-Rate Incomes Excluded from ₹12 Lakh Threshold

While total taxable income may include various income heads, not all are counted for Section 87A eligibility. Crucially:

❌ Excluded from Rebate Eligibility

The following special-rate incomes are not eligible for Section 87A rebate and are excluded when checking the ₹12 lakh rebate threshold (even though they remain part of total income for filing):

• Short-Term Capital Gains (STCG) under Section 111A – taxed at 20% for listed equity shares & equity-oriented funds where STT is paid.

• Long-Term Capital Gains (LTCG) – taxed at 12.5% on listed equities (beyond ₹1.25 lakh exemption).

• Other special-rate incomes like certain dividends or incomes taxed under Sections 115A/115D.

👉 These incomes are taxed at concessional/special rates and therefore cannot reduce tax liability under Section 87A, even if your total income is within ₹12 lakh.

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4. Capital Gains Tax Rates (STCG & LTCG)

Short-Term Capital Gains (STCG)

• STCG on listed equity shares, equity mutual funds, and business trust units where STT is paid is taxed at 20% (plus applicable surcharge and cess).

• STCG that is not covered under Section 111A (e.g., unlisted shares, debt funds) is taxed at normal slab rates. Income Tax India

Long-Term Capital Gains (LTCG)

• LTCG on listed equity shares & equity mutual funds is taxed at 12.5% on gains exceeding ₹1.25 lakh in a financial year (post-Budget revisions).

• LTCG on other assets (e.g., property, gold, unlisted securities) is also generally taxed at 12.5% under current provisions without indexation.

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5. Practical Tax Planning Implications

How to Evaluate Section 87A Eligibility

To determine if you qualify for the ₹12 lakh rebate:

1. Separate special-rate incomes (STCG/LTCG) from your tax computation.

2. Compute tax on slab-rated income (e.g., salary, house property, interest).

3. If slab-rated taxable income ≤ ₹12 lakh and computed tax ≤ ₹60,000 → full rebate applies.

4. Any tax on STCG or LTCG remains payable at its special rate (no rebate)

Example

If your total taxable income is ₹12 lakh including ₹1 lakh STCG:

• Regular income: ₹11 lakh tax at slab rates → eligible for full rebate.

• STCG ₹1 lakh taxed at 20% → ₹20,000 tax (no rebate).

• Net tax payable ≈ ₹20,000 + cess.

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6. Frequently Asked Questions (SEO-Focused)

Q1. What is the basic exemption limit under the new tax regime for AY 2026-27?
✔ Under the new regime, the basic exemption has been raised to ₹4 lakh.

Q2. Does the ₹12 lakh rebate under Section 87A apply to LTCG/STCG?
❌ No — special-rate incomes like STCG and LTCG are excluded from Section 87A rebates, though they remain taxable.

Q3. Are deductions available under the new regime?
✖ Most deductions such as 80C, 80D, etc., are not available under the new regime.

Q4. How is STCG at 20% different from slab rates?
STCG under Section 111A is taxed at a flat 20% irrespective of your slab rates.

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Conclusion

For AY 2026-27 / FY 2025-26, the Indian personal tax regime is more investor-friendly with:

• A higher basic exemption and relaxed tax slabs.

• A Section 87A rebate making taxable incomes up to ₹12 lakh effectively tax-free.

• Special-rate incomes (STCG & LTCG) remain taxed independently at preferential rates and are not eligible for the ₹12 lakh rebate

This structure rewards long-term investment and prudent tax planning while ensuring compliance with the latest Income Tax reforms.

CA. Pankaj Agrrawal, Indore