Comprehensive Guide to Section 87A Rebate and LTCG Taxation under Section 112A for FY 2025-26

The landscape of personal taxation in India is undergoing a significant transformation with the Finance Act 2025. For the Financial Year 2025-26, the interaction between the rebate available under Section 87A and income chargeable at special rates—specifically Long-Term Capital Gains (LTCG) under Section 112A—has become a focal point for tax planning.

Understanding these nuances is critical for the assessee, particularly when their income portfolio comprises a mix of salary (normal income) and market-linked gains. This detailed analysis explores the mechanics of the New Tax Regime, the specific exclusions mandated by recent amendments, and the computational logic required to determine final tax liability.

The Legislative Framework: Core Concepts

Before delving into complex scenarios, it is essential to establish the foundational rules governing the New Tax Regime for FY 2025-26.

1. The Scope of Section 87A Rebate

Section 87A serves as a relief mechanism for resident individuals. Under the revised New Tax Regime, an assessee is eligible for a tax rebate if their total income does not exceed Rs. 12,00,000.

Key attributes of the rebate include:

  • Eligibility Threshold: The total income must be Rs. 12,00,000 or less.
  • Maximum Relief: The rebate amount is capped at Rs. 60,000 or the actual tax payable on normal income, whichever is lower.
  • Exclusion of Special Income: A pivotal change in the Finance Act 2025 dictates that for the purpose of determining the Rs. 12,00,000 threshold, income taxable at special rates (such as LTCG under Section 112A or STCG under Section 111A) is excluded.
  • Non-Applicability to Special Rates: The rebate amount calculated can only be utilized to offset tax on normal income. It strictly cannot be set off against tax liabilities arising from special rate incomes.

2. Long-Term Capital Gains under Section 112A

Section 112A governs the taxation of profits arising from the transfer of listed equity shares or equity-oriented mutual funds, provided Securities Transaction Tax (STT) has been paid.

Taxation parameters for FY 2025-26:

  • Holding Period: Assets must be held for more than 12 months.
  • Tax Rate: The applicable tax rate is 12.5% (increased from previous years).
  • Exemption Limit: The first Rs. 1,25,000 of capital gains in a financial year is exempt from tax.
  • No Indexation: The benefit of indexation to adjust the cost of acquisition for inflation is not available under this section.

3. The Basic Exemption Limit (BEL)

Under the New Tax Regime for FY 2025-26, the Basic Exemption Limit stands at Rs. 4,00,000. This limit is universal for all individuals, regardless of age (senior citizen classifications do not alter this limit in the new regime).

Utilization of BEL:
The unexhausted Basic Exemption Limit can be adjusted against LTCG. This means if an assessee has no other income, or if their normal income is below Rs. 4,00,000, the remaining balance of this limit can reduce the taxable portion of their Capital Gains.

The Interplay: Rebate vs. Special Rate Income

The most critical aspect of tax planning for FY 2025-26 is understanding the "Stacking Order" of deductions, exemptions, and rebates.