Zero Tax up to Rs. 12.75 Lakh u/s 87A, But Will Short-Term Capital Gains Still Attract Income Tax?

Introduction

Imagine earning ₹12.5 lakh a year from your salaried job and not paying a single penny as income tax. Sounds incredible? This is exactly what the government promised with the Union Budget 2025 by extending the Section 87A rebate for salaried taxpayers under the new regime.

For crores of middle-class families, the announcement of “zero tax up to ₹12.75 lakh” came as a welcome relief. After years of incremental thresholds, this felt like a bold move to ease the tax burden for salaried citizens and pensioners.

But the key question troubling many is: “Does this zero-tax promise also apply to short-term capital gains (STCG) arising from stocks, mutual funds, or other investments?”

The straight answer is a big No. Even if your total income is below ₹12.75 lakh, short-term capital gains on equity shares or equity mutual funds continue to be taxed at a flat 15%, outside the purview of Section 87A rebate.

Why this distinction? To understand it, let’s unpack the law, recent rulings, and the budget changes that reshaped Section 87A.

Section 87A

Section 87A of the Income-tax Act, 1961 provides rebate of income tax for resident individuals when their income is within a specified limit. Unlike deductions (which reduce your taxable income), the rebate directly wipes out tax liability — up to a prescribed maximum.

How it evolved:

• Pre-2019: Small relief for incomes up to ₹3.5 lakh or ₹5 lakh.

• 2019 onwards: Flat rebate of ₹12,500 for total income up to ₹5 lakh.

• Budget 2023: Under new regime, enhanced to allow zero tax up to ₹7 lakh.

• Budget 2025: Big leap — zero tax up to ₹12.75 lakh in the new regime for salary and pension class.

But as the Finance Ministry clarified, this is not a blanket waiver. It comes with important exclusions — most notably for capital gains and business incomes.

Comprehensive Guide of Law and Procedure for Filing of Income Tax Appeals, Click Here

Short-Term Capital Gains (STCG): Understanding the Basics

Before jumping to why 87A excludes STCG, let’s clarify what short-term capital gains actually mean for most individual investors.

• Short-term capital asset: An equity share or equity-oriented mutual fund held for less than 12 months.

• Taxation under Section 111A: STCG on equity-oriented assets is taxed at a flat 15% rate plus cess and surcharge, irrespective of income slabs.

• Reporting: Has to be separately disclosed in ITR, under “Income from Capital Gains”.

This treatment was kept distinct to avoid arbitrage (where investors try to pass off trading/business incomes as normal income) and to ensure markets contribute fair tax revenue.

The Clash: Does Section 87A Apply on STCG?

Here’s where the confusion arose:

• Section 87A says rebate applies on “income-tax payable” if total taxable income ≤ the specified threshold (now ₹12.75 lakh in new regime).

• Some taxpayers argued this technically covers all taxes, including STCG under special provisions.

In fact, the ITR utilities of earlier years allowed adjustment of rebate even against STCG liability — leading to filing of returns showing zero tax despite capital gains.

Budget 2025: The Final Word

Finance Minister in Budget 2025 drew a clear boundary line:

Rebate under Section 87A will apply only to income taxed under normal slab rates.

It will specifically not apply to:

• Short-term capital gains under Section 111A (15% tax).

• Long-term capital gains under Sections 112/112A.

• Business income.

• Lottery, lottery-like winnings, or special rate incomes.

This closed the door on interpreting rebate as a universal relief.

So today, even if your total income is ₹10 lakh salary + ₹2 lakh STCG = ₹12 lakh, the rebate knocks off slab-based tax on salary but the ₹2 lakh STCG will be taxed at 15% flat rate.

Illustrative Scenarios

Let’s test it out with real-life examples:

Case 1: Salaried Only

Salary: ₹12.5 lakh

No STCG

Under new regime → Normal slab tax ~₹50,000 → Entirely wiped by Section 87A rebate.

Final tax = Nil.

Case 2: Salary + STCG

Salary: ₹11.9 lakh

STCG (equity): ₹2 lakh

Normal tax on salary: Wiped by 87A rebate.

STCG @ 15% on ₹2 lakh = ₹30,000 tax (plus cess).

Final tax = ~₹31,200.

Case 3: Only STCG

Salary: Nil

STCG = ₹4 lakh

No rebate applies on special rate income.

Tax at 15% = ₹60,000 + cess.

Final tax ≈ ₹62,400.

Case 4: Old Regime Century

Salary = ₹5 lakh

Old regime → Eligible rebate of ₹12,500 wipes out liability.

If STCG exists → Will still pay 15% tax; no offset possible.

Comprehensive Guide of Law and Procedure for Filing of Income Tax Appeals, Click Here

Why Did Govt Exclude STCG from 87A Relief?

From a policy perspective, exclusion had three main reasons:

• Preventing misuse: Traders or frequent investors could otherwise book large STCG and still escape tax liability by combining with low salary/pension income.

• Revenue safeguarding: The government collects thousands of crores annually from STCG tax (especially with growing retail participation in markets).

• Equity argument: Salaried income is stable and predictable, deserving relief; market-related gains are speculative and meant to remain taxed at concessional but firm rates.

Impact on Ordinary Investors

For the salaried middle class with no trading income — life is simple: earn ≤ ₹12.75 lakh → pay zero tax under the new regime.

But for the growing number of retail investors in:

Stock markets,

• Mutual Funds SIPs redeemed within a year,

• Intraday/short trades clubbed as capital gains,

The reality is different. Tax at 15% on STCG remains payable, regardless of total income or 87A rebate eligibility.

This means:

• Investors with even modest ₹50,000 profit will have to pay ₹7,500 tax, even though their salary falls under the rebate threshold.

• For first-time taxpayers, this often comes as a rude shock during filing.

Reader FAQs

Q1: My income is ₹10 lakh salary + ₹1 lakh STCG. Will I pay tax?

Ans: Salary tax wiped by rebate, but STCG attracts 15%. You’ll pay ~₹15,600.

Q2: What if I only earn ₹4 lakh STCG, no salary?

Ans: You pay ~₹62,400 even though your income is way below ₹12.75 lakh.

Q3: Can I adjust the basic exemption against STCG?

Ans: Yes, if you have no other income, you can adjust up to ₹2.5 lakh basic limit. Only the balance STCG gets taxed at 15%. But rebates won’t apply.

Q4: Do long-term capital gains benefit from rebate?

Ans: No. LTCG beyond ₹1 lakh remains taxable at 10%.

Q5: So who benefits most from 87A?

Ans: Salaried or pension earners without capital/business income.

Comprehensive Guide of Law and Procedure for Filing of Income Tax Appeals, Click Here

The Bigger Picture: Section 87A as a Political and Economic Tool

While Section 87A rebate offers huge relief to salaried classes, it simultaneously tightens tax discipline on investment gains. This dual strategy reflects the government’s economic objective:

• Middle class appeasement: wipe off liability for fixed income earners who form the largest taxpayer block.

• Market taxation discipline: investors, traders, and entrepreneurs continue contributing revenue.

• Essentially, your salary might escape tax up to ₹12.75 lakh, but your stock profits won’t.

Conclusion

But the truth for investors is more nuanced. Short-term capital gains remain taxable at 15%, untouched by rebate benefits.

So next time a friend tells you: “Bro, there’s zero tax up to ₹12.75 lakh now!” — you may want to answer:

“Yes, but not if those lakhs came from your stock portfolio. Section 87A doesn’t work magic on capital gains. The taxman still gets his cut.”

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