New Tax Rule 2026: Why the ₹12 Lakh Rebate Doesn't Cover Your Stock Market Gains

By Nitish Bharadwaj · Published Jul 5, 2026 · 6 min

Many new-regime taxpayers assume the Section 87A rebate makes their entire income up to ₹12 lakh tax-free in FY 2025-26. It does — but only for income taxed at slab rates. The Finance Act, 2025 clarified that short-term capital gains under Section 111A and long-term capital gains under Section 112A are taxed separately at their own special rates, and the 87A rebate cannot be applied against that tax, regardless of how low your total income is. This guide walks through a worked example showing exactly how much tax an investor with capital gains still owes, even while comfortably under the ₹12 lakh threshold.

If you've heard that income up to ₹12 lakh is tax-free under the new regime in FY 2025-26, that's true — but only for income taxed at slab rates. Investors with stock market or mutual fund gains are discovering a less-publicised catch: the Finance Act, 2025 explicitly blocks the Section 87A rebate from offsetting tax on capital gains, so a taxpayer comfortably under ₹12 lakh in total income can still owe real tax purely on their gains.

How the ₹12 Lakh Rebate Is Supposed to Work

Under the new tax regime for FY 2025-26, Section 87A gives resident individuals a rebate of up to ₹60,000 when total taxable income doesn't exceed ₹12 lakh — which, combined with the ₹75,000 standard deduction, is why salaried employees with income up to roughly ₹12.75 lakh often end up paying zero tax. See our new vs old regime breakeven guide for the full salary-only math. The old regime has its own, smaller version: a rebate of up to ₹12,500 for total income up to ₹5 lakh.

The Change: Capital Gains Are Now Explicitly Excluded

The Finance Act, 2025 clarified that the Section 87A rebate cannot be adjusted against tax computed on income taxed at special rates — specifically short-term capital gains on listed equity and equity mutual funds under Section 111A (taxed at 20%) and long-term capital gains under Section 112A (taxed at 12.5% above the ₹1.25 lakh annual exemption). This holds even when total income, including the gains, stays within the ₹12 lakh threshold.

Worked Example: Under ₹12 Lakh, Still Owes Tax

Ramesh's total income of ₹10.5 lakh is comfortably under the ₹12 lakh threshold, and his slab-rate tax of ₹35,000 is fully wiped out by the 87A rebate. But the ₹20,000 tax on his STCG stands untouched, plus 4% cess — roughly ₹20,800 payable, even though every popular explanation of the ₹12 lakh rule would suggest he owes nothing. The same logic applies to LTCG under Section 112A: gains above the ₹1.25 lakh annual exemption are taxed at 12.5% with no rebate offset available, no matter how small your other income is.

What This Means for Investors

This doesn't change how capital gains on mutual funds are taxed — the rates and the ₹1.25 lakh LTCG exemption are unchanged from Budget 2024. What it changes is the assumption that low total income shields you from capital gains tax entirely under the new regime. If you're realising gains this year, harvest LTCG up to the ₹1.25 lakh exemption each financial year rather than letting it accumulate, since that exemption — unlike the 87A rebate — does directly reduce your capital gains tax. Use the income tax calculator to model your slab-rate and capital-gains tax separately before assuming a low total income means a zero tax bill.

Dividends work the other way: they are taxed at slab rates, so the rebate covers them in full. Our guide to how dividend income is taxed explains the 10% TDS above ₹10,000 and how to get it refunded when your income is under ₹12 lakh.