Understanding the Budget rebate benefits—and the fine print on capital gains tax

But here’s the catch: While Budget 2025 offers a welcome increase in the tax rebate limit, only certain types of income qualify for this benefit. Capital gains, whether from property sales or stock market profits, are excluded from the rebate, meaning Mr. A’s tax savings won’t be as generous as he initially thought.

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Budget 2025 raised the income threshold, under the income tax regime, for the rebate to ₹12 lakh, up from ₹7 lakh, and increased the rebate amount, section 87-A, to ₹60,000 from ₹25,000. On the surface, this is great news for taxpayers.

However, Anurag Jain, a chartered accountant and co-founder & partner at ByTheBook Consulting LLP, clarifies that the rebate applies only to income taxed at the regular slab rates. “It will not be available on income subjected to tax at special rates such as capital gains (long-term and short-term),” he explains.

For Mr. A, this means his salary and interest income will benefit from the rebate, but his capital gains from property and the stock market will be taxed separately—at their special rates. This could significantly reduce his tax savings, despite his total income qualifying for the new rebate limit.

This distinction between regular income and special income has been a point of contention in recent years. 

Tax expert Vishwas Panjiar, partner at Nangia Andersen LLP, explains that the issue was recently addressed by the Bombay High Court, which upheld the government’s position. As a result, capital gains income remains ineligible for the section 87-A rebate.

“The taxpayer alleged that the (income tax) department has unilaterally prohibited, taxpayer from claiming rebate on special income, by way of changes in the ITR utility itself. The Bombay High Court directed the tax department in a very recent ruling dated 24 January 2025 to allow the taxpayer from claiming the rebate. The government has now reiterated its stand and have mentioned that rebate under section 87-A will not be available on income which is chargeable at special rate. So, essentially, short term capital gain on assets (other than listed securities) will only be eligible for rebate as it is taxed at the normal slab rates,” he said.

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For example: If an individual has an income of ₹14 lakh, including a long-term capital gain of ₹3 lakh on listed securities, the rebate will not apply to the ₹3 lakh in capital gains. This amount will be taxed at the standard rate of 12.5%, despite the rebate being available for income up to ₹12 lakh under the new tax regime

What this means for your tax planning

Let’s break it down with a practical example:

Mr. A has a salary income of ₹9.45 lakh and rental income of ₹1 lakh. He also sold some shares, incurring long-term capital gains of ₹2 lakh. The interest income from his savings account stands at ₹30,000. His total income now comes to ₹12.75 lakh. As a salaried employee, he will be eligible for a standard deduction of ₹75,000, reducing his taxable income to ₹12 lakh.

In this ₹12 lakh, the ₹2 lakh capital gains from the sale of shares will be taxed at 12.5% in both scenarios. This amounts to ₹9,375, taking into account the LTCG exemption of ₹1.25 lakh. His rental income will be taxed along with salary and interest income at the slab rates.

The tax amount will come to ₹50,000 based on FY25 slab rates and ₹40,000 based on FY26 slab rates. Since ₹10 lakh of income ( ₹12 lakh – ₹2 lakh) is eligible for the tax rebate in FY26, Mr. A’s tax liability of ₹40,000 will become zero. The net tax after rebate will stand at ₹9,375.

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In contrast, under FY25 slab rates, where the 87-A rebate is limited to a taxable income of ₹7 lakh, his tax liability will be ₹59,375 ( ₹50,000 + ₹9,375). Including the education cess, his total tax liability for FY25 will be ₹61,750 and ₹11,350 for FY26. This results in a saving of ₹50,400 in FY26 compared to FY25, thanks to the adjustments in the slab rates and the hike in the tax rebate.