By CA Surekha S. Ahuja
New Tax Regime | AY 2026-27 (FY 2025-26)
Finance Act 2025 Has Clarified the Legislative Position
One of the most debated questions in recent years was whether the rebate under Section 87A could reduce tax payable on Long-Term Capital Gains taxable under Section 112A.
The issue gained prominence after Finance Act 2025 increased the rebate under the new tax regime to Rs.60,000 and raised the income threshold to Rs.12 lakh.
Finance Act 2025 has now addressed the matter through an express statutory amendment.
For AY 2026-27 onwards, the law makes it clear that the enhanced rebate under Section 87A is available only against tax computed under the slab rates of the new tax regime and not against tax payable under special-rate provisions such as Section 112A.
The Three Provisions Every Investor Must Understand
The taxation of equity Long-Term Capital Gains under the new regime is now governed by the interaction of three provisions.
Section 112A
Section 112A applies to Long-Term Capital Gains arising from:
• Listed equity shares satisfying the prescribed STT conditions
• Units of equity-oriented mutual funds
• Units of business trusts
For AY 2026-27:
• Tax rate: 12.5%
• Annual exemption: Rs1,25,000
• Indexation: Not available
• Grandfathering provisions for assets acquired before 31 January 2018 continue to apply
Section 87A
Finance Act 2025 substantially enhanced the rebate available under the new regime.
| Particulars | AY 2026-27 |
|---|---|
| Maximum rebate | Rs.60,000 |
| Threshold for rebate eligibility | Normal income taxable at slab rates not exceeding Rs12,00,000 |
| Eligible taxpayer | Resident Individual |
However, the enhancement came with an equally important restriction.
Section 115BAC
Section 115BAC(1A) contains the slab rates applicable under the default new tax regime.
The significance of this provision lies in the language used in the newly inserted second proviso to Section 87A.
The Finance Act 2025 Amendment
With effect from AY 2026-27, Finance Act 2025 inserted a second proviso to Section 87A which provides that the rebate shall not exceed the amount of income tax payable at the rates specified under Section 115BAC(1A).
This amendment is the key to understanding the new position.
Since tax under Section 112A is charged at a special rate and not at the slab rates prescribed under Section 115BAC(1A), the rebate cannot be used to reduce tax payable on such gains.
In practical terms:
✓ Rebate may reduce tax on salary income
✓ Rebate may reduce tax on business income
✓ Rebate may reduce tax on house property income
✓ Rebate may reduce tax on other slab-rate income
✗ Rebate cannot reduce tax on LTCG taxable under Section 112A
An Important Distinction Taxpayers Must Understand
The restriction on rebate against Section 112A gains is separate from the determination of rebate eligibility.
A taxpayer may satisfy the conditions of Section 87A and still be liable to pay tax on Long-Term Capital Gains under Section 112A.
For example, a resident individual having salary income within the prescribed rebate threshold and Long-Term Capital Gains taxable under Section 112A may qualify for the rebate in respect of the slab-rate tax. However, the tax payable on the Long-Term Capital Gain will continue to be computed separately under Section 112A and cannot be reduced by the rebate.
This distinction is likely to be one of the most important practical aspects of the amendment.
What Has Not Changed
Annual Exemption of Rs.1.25 Lakh Continues
The first Rs.1,25,000 of eligible Long-Term Capital Gains remains exempt every financial year irrespective of the taxpayer's income level.
Grandfathering Continues
For specified equity investments acquired before 31 January 2018, the grandfathering provisions introduced when Section 112A was enacted continue to apply.
Indexation Remains Unavailable
Section 112A continues to tax gains without the benefit of indexation.
Surcharge Cap of 15% Continues
The surcharge on tax attributable to gains under Section 112A remains capped at 15%, even where the taxpayer falls in a higher surcharge bracket.
Consequently, the effective tax burden on such gains remains substantially lower than the maximum tax burden applicable to ordinary income.
What the Amendment Actually Does
The amendment does not:
• Increase the tax rate under Section 112A
• Withdraw the annual exemption of Rs.1,25,000
• Remove grandfathering benefits
• Alter the statutory surcharge cap of 15%
Its primary effect is to restrict the enhanced Section 87A rebate to tax computed under the slab rates of the new tax regime.
Key Takeaway
Finance Act 2025 has provided legislative clarity on the interaction between Section 87A and Section 112A.
From AY 2026-27 onwards, the enhanced rebate of up to Rs.60,000 is available only against tax computed under the slab rates of the new tax regime. Tax payable on Long-Term Capital Gains under Section 112A remains outside the rebate mechanism and continues to be taxed separately at 12.5% after the annual exemption of Rs.1.25 lakh.
For investors and taxpayers, the focus should now move away from rebate-based interpretations and towards understanding the practical implications of Section 112A, including annual exemption utilisation, surcharge treatment, capital loss set-off, tax-efficient exit planning and accurate return reporting—topics that we examine in Part 2.
