The Union Budget 2025 introduced a significant tax relief for individuals earning up to Rs 12 lakh by raising the rebate limit under Section 87A, resulting in effectively zero tax. However, not all sources of income qualify for this benefit. Income from capital gains, lotteries, and other categories taxed at special rates remains ineligible for the rebate.
“…rebate is not available on income from capital gains or lotteries or any other income on which special rate has been provided in the Act. It is available only on the tax payable as per slabs under section 115BAC,” the tax department answered responding to FAQs.
Under the new tax regime, individuals earning up to Rs 12 lakh can avail of a rebate of Rs 60,000, an increase from the previous Rs 25,000 applicable for incomes up to Rs 7 lakh. While this move provides relief to salaried individuals and those with regular income sources, capital gains and other special-rate incomes are excluded from the rebate benefit.
For instance, if an individual earns Rs 13 lakh annually, including Rs 3 lakh as long-term capital gains from the sale of listed securities, only Rs 10 lakh would be eligible for regular slab taxation. The Rs 3 lakh in capital gains would be taxed separately at 12.5%, without any rebate benefit. This means the taxpayer will still have to pay tax on that portion of their income, even if their total earnings fall within the rebate threshold.
Clarity on capital gains taxation
This exclusion has been a subject of debate. The Bombay High Court recently ruled that the Income Tax Department should not prevent taxpayers from claiming rebates on special-rate income solely due to software restrictions in the tax filing system. The court said that rebate claims should be assessed during the tax scrutiny process, rather than being blocked outright. Despite this, Budget 2025 has reinforced the government’s stance that capital gains, lottery winnings and similar income sources will not be eligible for the rebate.
Also read: Budget 2025: Earning Rs 12 lakh could mean a bigger take-home salary than Rs 13 lakh? See tax calculations
Impact on taxpayers and future compliance
The government’s clarification suggests that taxpayers who have already claimed the rebate against capital gains in previous financial years (FY24 and FY25) may not be affected,
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