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The Income Tax Department has officially clarified the scope of the ₹60,000 rebate available under Section 87A in the New Tax Regime, putting an end to widespread confusion among taxpayers. The department has clearly stated that this rebate is not applicable to all types of income. In particular, income earned from equity investments, capital gains, and lottery winnings will remain outside its purview.

This clarification has been issued through official FAQs and is expected to significantly influence tax planning strategies, especially for investors who rely heavily on stock market returns.

What the Income Tax Department Clarified

According to the Income Tax Department, the rebate under Section 87A is restricted only to income taxed at normal slab rates. Any income that is taxed at special rates, as defined under the Income Tax Act, will not qualify for the rebate.

This rule applies strictly under the New Tax Regime, which has now become the default tax system for individual taxpayers.

Why Capital Gains from Equity Are Excluded

Equity-related income such as:

• Long-Term Capital Gains (LTCG) from equity shares and equity mutual funds

• Short-Term Capital Gains (STCG) from equity instruments

are taxed at special rates (10% or 15%, depending on the nature of the gain). Since these rates are not part of the regular income tax slabs, they are excluded from Section 87A benefits.

Similarly, income from lottery winnings, betting, gambling, and similar sources, which are taxed at a flat rate of 30%, also does not qualify for the rebate.

Maximum Rebate Limit Under the New Tax Regime

Under the New Tax Regime, an individual taxpayer can claim a maximum rebate of ₹60,000 under Section 87A. This rebate is available only if the taxpayer’s taxable income (slab-rate income) does not exceed ₹12 lakh in a financial year.

Once the tax is calculated as per slab rates, the rebate can reduce the tax liability to zero, provided the income criteria are met.

Additional Benefit for Salaried Individuals

Salaried taxpayers get a slight advantage due to the standard deduction of ₹75,000. Because of this deduction, salaried individuals can effectively earn up to ₹12.75 lakh annually and still qualify for the Section 87A rebate—as long as the income is salary-based or slab-rate income.

However, it is crucial to understand that capital gains are not included in this calculation, even for salaried individuals.

When Can You Actually Pay Zero Tax?

The Income Tax Department has made it clear that the zero-tax benefit using the Section 87A rebate is available only under the New Tax Regime. Taxpayers must also file their income tax return to claim this rebate. Failure to file a return will result in the loss of this benefit.

This clarification reinforces the need for taxpayers to carefully evaluate the nature of their income before assuming eligibility for tax rebates.

Impact on Investors and Tax Planning

This announcement is particularly important for investors who assumed that capital gains would be covered under the rebate. With equity gains excluded, investors may need to rethink their tax-saving strategies and assess whether the New or Old Tax Regime suits them better.

Tax experts advise reviewing income composition carefully before making regime selections for the upcoming assessment years.