Income Tax Alert: How Capital Gains Affect Rs. 12 Lakh Rebate Limit?

The calculation of the tax rebate continues to be confusing, particularly when income from capital gains is involved. This was an issue that followed after Finance Minister Nirmala Sitharaman raised the rebate limit under Section 87A of the Income Tax Act from Rs. 7 lakh to Rs. 12 lakh in the Union Budget 2025-26.

After including the standard deduction of Rs. 75,000, the effective rebate limit becomes Rs. 12.75 lakh for salaried persons.

This raised an important question what happens if someone with a Rs. 12 lakh salary earns an extra Rs. 1 lakh from capital gains?

Capital Gain Tax

If the rebate applies only to regular income, a person earning Rs. 12 lakh from salary should still qualify for the rebate, even if they have additional gain. Capital gains are also considered when checking rebate eligibility, then crossing Rs. 12 lakh may make them ineligible, and the final decision will depend on the exact wording in the Finance Bill.

The same doubt exists under the current tax rules as well. Currently, as per Section 87A, you are entitled to a rebate in tax if your overall income (including capital gains) is less than Rs. 7 lakh. But capital gains are taxed independently. If your capital gains push your overall income above Rs. 7 lakh, you will lose the rebate.