Section 87A Rebate: Is Income Up to ₹12.75 Lakh Entirely Tax-Free for Salaried Individuals? Here’s the Exception
Under the new tax regime, salaried taxpayers earning up to ₹12 lakh per year—with an additional ₹75,000 standard deduction—can enjoy a fully tax-free income. As per the Budget 2025-26, this brings the total tax-exempt limit for salaried individuals to ₹12.75 lakh annually.
The Finance Act, 2025, introduced significant changes to the Section 87A rebate. The tax-free income threshold was increased from ₹7 lakh to ₹12 lakh, providing relief to millions of salaried taxpayers.
However, there is an important exception: income taxed at special rates, such as short-term capital gains (STCG) and long-term capital gains (LTCG), will not qualify for the Section 87A rebate. This means that even if a salaried taxpayer’s total income is below ₹12.75 lakh, any STCG or LTCG in FY 2025-26 will be taxed at the applicable special rate.
The Finance Act, 2025, also amended clause (iii) of Section 115BAC(1A) to incorporate the enhanced standard deduction of ₹75,000. Earlier, a drafting error had reduced this deduction to ₹50,000, preventing salaried taxpayers from fully benefiting from the new tax regime.
Finance Minister Nirmala Sitharaman clarified in the Lok Sabha on August 13 that the standard deduction for salaried individuals under the new regime is now correctly fixed at ₹75,000, providing much-needed clarity.
As reported by The Economic Times, Taxmann Vice President Naveen Wadhwa highlighted the importance of this correction:
“The proviso to Section 16(ia) referenced clause (ii) of Section 115BAC(1A) for AY 2025-26 but omitted clause (iii) which applies to AY 2026-27. This omission denied the enhanced ₹75,000 standard deduction for the current FY. The latest Taxation Laws (Amendment) Bill, 2025, rectifies this drafting error.”
In short: Salaried taxpayers earning up to ₹12.75 lakh can now avail full tax exemption under the new regime, except for STCG and LTCG, which remain taxable at special rates.
