Table of Contents
Introduction
The Finance Bill, 2025, has introduced a significant amendment to Section 87A of the Income Tax Act, 1961, with implications for taxpayers opting for the new tax regime. A new proviso has been inserted to explicitly prohibit the rebate on incomes chargeable at special rates, such as capital gains taxable under Sections 111A, 112, etc. under the new tax regime. This amendment is set to take effect from Assessment Year (AY) 2026-27 and is likely to impact the tax planning strategies of many individuals.
📌 Disclaimer: The following article represents the author’s views based on personal analysis and interpretation of the Budget Speech 2025 and the Finance Bill 2025 for educational purposes. Readers are advised to consult a professional tax advisor for personalized tax planning.
Legislative Intent and Government’s Stance on Section 87A Amendment
The Memorandum to the Finance Bill, 2025, clarifies that even under the existing first proviso to Section 87A, the rebate was never available on special incomes. The newly inserted second proviso merely formalizes this interpretation and serves as a clarificatory amendment, reaffirming the government’s position that rebate benefits do not extend to incomes taxed at special rates.
Key Implications
- Retrospective Effect: The CPC (Centralized Processing Center) is expected to disallow rebate claims on special incomes for prior assessment years while processing pending income tax returns. This may lead to tax demand notices and potential litigation.
- Clarificatory Amendment: The government maintains that rebate on special incomes was never intended to be available, even before AY 2026-27. The amendment simply reinforces this position in statutory language.
- Impact on Past Tax Filings: Taxpayers who previously claimed rebates on short-term capital gains (STCG) under Section 111A or long-term capital gains (LTCG) under Section 112 may be subject to reassessment and additional tax liabilities.
Impact from AY 2026-27 Onwards
With this amendment taking effect from AY 2026-27, the rebate under Section 87A will be available only under the old tax regime.
Implications for Taxpayers
- New Tax Regime Without Special Income: Taxpayers with only normal income up to ₹12 lakh may not have to pay any tax under the new tax regime due to the higher basic exemption limit and lower slab rates.
- New Tax Regime With Special Income: If the taxpayer has additional special incomes, such as capital gains under Sections 111A or 112, they will not be eligible for the rebate under Section 87A, even if their total taxable income falls within the rebate threshold.
- Tax Regime Selection Becomes More Crucial: Taxpayers must carefully evaluate their income composition before selecting between the old and new tax regimes, as the exclusion of rebate on special incomes could result in higher tax outflows.
Key Considerations for Taxpayers
- Reassessment of tax liabilities under both regimes before opting for the new tax regime.
- Detailed tax planning for capital gains and other special incomes to avoid unexpected tax burdens.
- Ensuring compliance while filing income tax returns to mitigate the risk of litigation or tax disputes.
- Consulting a tax expert for a thorough evaluation of tax positions and to ensure optimal tax savings.
Conclusion
The amendment to Section 87A in the Finance Bill 2025 reinforces the government’s stance on excluding special incomes from rebate benefits under the new tax regime. Taxpayers must reassess their tax planning strategies in light of this change, ensuring that they are fully compliant with income tax laws while minimizing tax liability.
Seek Professional Guidance
Navigating income tax amendments and their implications requires expert analysis. At TaxGroww, we offer tailored tax solutions to help you make informed decisions about the best tax regime for your financial situation.
For expert guidance on income tax compliance and strategic tax planning, contact TaxGroww today