The Section 87A rebate has been the source of more taxpayer confusion than any other clause in the last two filing seasons. CBDT's April 17, 2026 circular settles the most contested question: the rebate does not apply to flat-rate capital gains tax.
What Section 87A does
Section 87A is a tax rebate — a direct deduction from your final tax liability. It works in two flavours:
New regime (default for AY 2026-27): - Rebate of up to ₹25,000 if your taxable income is up to ₹7,00,000. - Marginal relief between ₹7,00,001 and ₹7,50,000 (so a small bump above ₹7L doesn't suddenly cost ₹25,000+ in tax).
Old regime: - Rebate of up to ₹12,500 if your taxable income is up to ₹5,00,000. - No marginal relief — at ₹5,00,001, full tax liability kicks in.
The CBDT clarification
The April 17 circular confirms what tax practitioners had been arguing for two years: Section 87A applies only to tax computed at slab rates. It cannot reduce tax on:
- Short-term capital gains (STCG) on equity under Section 111A — taxed at 15% flat
- Long-term capital gains (LTCG) on equity under Section 112A — taxed at 12.5% above ₹1.25 lakh
- Long-term capital gains on debt/property under Section 112 — taxed at 12.5%
This means even if your total taxable income (including capital gains) is below ₹7 lakh, the portion that comes from capital gains is taxed at the flat rate without any 87A offset.
Worked example 1: Pure salary, ₹6 lakh taxable income (new regime)
- Income tax at slab: ₹15,000 (5% on ₹3-6 lakh slice)
- Section 87A rebate: ₹15,000 (capped at the actual tax)
- Final tax: ₹0
- Plus: Health & Education Cess at 4% on ₹0 = ₹0
Result: zero tax payable.
Worked example 2: ₹5.5 lakh salary + ₹1.5 lakh equity STCG (new regime)
Total taxable income: ₹7,00,000.
- Tax on salary at slabs: ₹10,000 (5% on ₹3-5.5 lakh, ₹2.5 lakh slice)
- Tax on STCG at 15%: ₹22,500
- Section 87A rebate: applies only to slab tax → ₹10,000 cancelled
- Tax payable: ₹0 (slab) + ₹22,500 (STCG) = ₹22,500
- Cess at 4%: ₹900
- Total: ₹23,400
Compare this to the wrong assumption ("total income under ₹7L, so zero tax"). The actual liability is ₹23,400.
Worked example 3: ₹6.5 lakh salary + ₹60,000 equity LTCG (new regime)
LTCG up to ₹1.25 lakh is exempt under Section 112A. So the ₹60,000 is fully exempt.
- Tax on salary at slabs: ₹17,500
- Tax on LTCG: ₹0 (under exemption)
- Section 87A rebate: ₹17,500 (capped)
- Final tax: ₹0
This case works exactly as you'd hope. The exemption keeps LTCG out of the picture, and 87A wipes the slab tax.
Worked example 4: ₹7.1 lakh salary + ₹2 lakh LTCG (new regime)
- Total income: ₹9.1 lakh, so 87A doesn't apply at all (above ₹7L threshold and outside marginal relief band)
- Tax on salary at slabs: ₹26,000
- LTCG tax: 12.5% × (₹2,00,000 - ₹1,25,000) = ₹9,375
- Total: ₹35,375 + 4% cess = ₹36,790
Old regime version
Old regime taxpayers with taxable income up to ₹5 lakh get a ₹12,500 rebate. Same rule applies: only slab tax can be wiped, not flat-rate capital gains.
What this means in practice
If you have capital gains in FY 2025-26:
1. Compute slab tax separately from capital gains tax. Don't lump them. 2. Apply 87A only to the slab portion. 3. Pay capital gains tax in full at the flat rate.
This affects: stock traders, mutual fund switchers, ESOP exercisers, and anyone who sold property with debt-like indexation gains.
Bottom line
If your AIS shows capital gains and your total income is near ₹7 lakh, run two calculations: salary-only with 87A, and capital-gains tax separately. The total is often higher than expected. Use our income tax calculator and capital gains calculator together to model both before you file.