Income tax below 12 lakhs
You may have to PAY INCOME TAX even when your total income is less than Rs 12 Lakhs
Dated 26.11.2025 : The exemption of ₹ 12 lakhs for Financial Year (FY) 2025-26 (Assessment Year 2026-27) is due to the enhanced Section 87A rebate under the New Tax Regime (Section 115BAC) .
While a resident individual’s income of up to ₹12 lakhs is effectively tax-free under this regime, there are specific circumstances where you would still have to pay income tax even if your total income is below that limit .
1. Income Taxed at Special Rates (The Main Exception)
The rebate under Section 87A is primarily available against the tax calculated on your normal income (like salary, interest, house property, etc., taxed at slab rates). However, it is not available on tax related to certain types of “special income,” primarily Capital Gains starting from FY 2025-26 under the new tax regime.
- Short-Term Capital Gains (STCG) on Equity Shares/Equity Mutual Funds (Section 111A): These are typically taxed at a flat rate of 15%. If your total income is less than ₹12 lakhs but includes significant STCG u/s 111A, you will likely have to pay tax on that capital gain portion.
- Example: If your total income is ₹8 lakhs, consisting of ₹ 7 lakhs salary and ₹1 lakh STCG u/s 111A. Your salary income will be covered by the rebate, but the ₹1 lakh STCG will be taxed at 15% (plus cess), as the rebate does not apply to it.
- Long-Term Capital Gains (LTCG) on Equity Shares/Equity Mutual Funds (Section 112A): This is taxed at 10% (above $\text{₹}1.25 \text{ lakhs}$ for FY 2025-26).
- Other Capital Gains: Tax on most other Long-Term Capital Gains (LTCG) u/s 112 (taxed at 20% with indexation or 10% without indexation) is also not eligible for the rebate.
2. Residential Status
The rebate under Section 87A is available only to an individual who is a Resident in India. If you are an NRI, you are not eligible to claim the Section 87A rebate, regardless of your total income. Therefore, you would pay tax as per the applicable slab rates on your income taxable in India, even if it is below ₹12 lakhs.
- 3. Choosing the Old Tax Regime
- The benefit of tax-free income up to ₹12 lakhs is an exclusive feature of the New Tax Regime for FY 2025-26.
- Old Tax Regime: If you opt for the Old Tax Regime, the Section 87A rebate is only available for a total income up to ₹5 lakhs (maximum rebate of ₹12,500. If your income is, say, ₹6 lakhs under the old regime, you would pay tax on the difference, even though it is below ₹12 lakhs.
EXAMPLE CASE WITH SHORT-TERM CAPITAL GAIN
Let’s walk through a specific Tax Calculation Example for FY 2025-26, assuming the individual has opted for the New Tax Regime (Section 115BAC), which grants the maximum ₹60,000 rebate for total income up to ₹12 lakhs .
Scenario: Tax on Normal Income + Short-Term Capital Gains (STCG)
| Particulars | Amount (₹) | Details |
| Gross Total Income (GTI) | ₹11,00,000 | Below the ₹12 lakh threshold. |
| Normal Income (Salary, Interest, etc.) | ₹9,00,000 | Income taxed at New Regime Slab Rates. |
| Short-Term Capital Gains (STCG) u/s 111A | ₹2,00,000 | Gains from sale of listed shares/equity mutual funds held for 12 months, taxed at a special rate of 15%. |
Step 1: Calculate Tax on Normal Income (Slab Rates)
The New Tax Regime slab rates for FY 2025-26 are:
| Taxable Income Range (₹) | Tax Rate | Calculation | Tax (₹) |
| Up to ₹4,00,000 | Nil | – | ₹0 |
| ₹4,00,001 to ₹8,00,000 | 5% | 5 % of ₹4,00,000 | ₹20,000 |
| ₹8,00,001$ to ₹9,00,000 | 10% | 10% of ₹1,00,000 | ₹10,000 |
| Tax on Normal Income ₹9,00,000 | ₹30,000 |
Step 2: Calculate Tax on Special Income (Capital Gains)
Tax on STCG u/s 111A is charged at a flat rate of $\mathbf{15\%}$.
- Tax on STCG of ₹2,00,000
15 % of } ₹2,00,000 = ₹30,000
Step 3: Calculate Total Tax Liability (Before Cess)
| Particulars | Amount (₹) |
| Tax on Normal Income (from Step 1) | ₹30,000 |
| Tax on Special Income (from Step 2) | ₹30,000 |
| Total Tax Payable (G) | ₹60,000 |
Step 4: Apply Rebate U/S 87A
The total income (₹11,00,000) is less than the ₹12 lakh limit, so the rebate is applicable. The maximum rebate is ₹60,000 or the total tax payable (G), whichever is lower.
- Rebate Available: Lower of ₹60,000 or ₹60,000= ₹60,000
However, this is the critical point for FY 2025-26:
The Finance Act 2025 explicitly restricts the Section 87A rebate from being adjusted against tax payable on “Special Rate Incomes,” including STCG u/s 111A.
The rebate can only be used to make the tax on the Normal Income zero.
- Tax on Normal Income: ₹30,000
- Rebate applied against Normal Income: ₹30,000
- Tax on Normal Income (Post-Rebate): ₹0
The remaining rebate ₹60,000 – ₹30,000 = ₹30,000 cannot be used to nullify the tax on STCG.
Step 5: Final Tax Payable
| Particulars | Amount (₹) |
| Total Tax Payable (from Step 3) | ₹60,000 |
| Less: Rebate u/s 87A (Applied to Normal Income) | ₹30,000 |
| Net Tax before Health & Education Cess | ₹30,000 |
| Add: Health & Education Cess @ 4% | 4% of ₹30,000 = ₹1,200 |
| NET TAX PAYABLE | ₹31,200 |
Even though the total income is ₹11,00,000 (less than the ₹12 lakh limit), the individual has to pay ₹31,200 as income tax because the Section 87A rebate is not available against the ₹2,00,000 of Short-Term Capital Gains taxed at the special rate of 15% (u/s 111A).
This highlights that the ₹12 lakh tax-free limit primarily applies to income taxable at normal slab rates.
- EXAMPLE CASE WITH LONG-TERM CAPITAL GAIN
Dealing with Long-Term Capital Gains (LTCG) under the new regime introduces a slightly different wrinkle in the calculation.
Let’s proceed with a calculation for LTCG u/s 112A to see how the tax liability remains even when the total income is below the ₹12 lakh threshold.
Scenario: Tax on Normal Income + Long-Term Capital Gains (LTCG)
We assume the individual has opted for the New Tax Regime (Section 115BAC) for FY 2025-26.
| Particulars | Amount (₹) | Details |
| Gross Total Income (GTI) | ₹11,25,000 | Below the ₹12 lakh threshold. |
| Normal Income (Salary, Interest, etc.) | ₹8,00,000 | Income taxed at New Regime Slab Rates. |
| LTCG u/s 112A (on Equity/Equity MF) | ₹3,25,000 | Gains from sale of listed shares/equity mutual funds held for 12 months, taxed at a special rate of 12.5 % on gains exceeding ₹1. 25 lakh. |
Let’s proceed with a calculation for LTCG u/s 112A to see how the tax liability remains even when the total income is below the threshold
The effective threshold for LTCG u/s 112A for tax calculation is ₹1 .25 lakh . The taxable LTCG will be:
Taxable LTCG = ₹ 3,25,000 – ₹1,25,000 = ₹2,00,000
Step 1: Calculate Tax on Normal Income (Slab Rates)
| Taxable Income Range (₹) | Tax Rate | Calculation | Tax (₹) |
| Up to ₹4,00,000 | Nil | – | NIL |
| ₹4,00,001$ to ₹8,00,000 | 5% | 5% of ₹4,00,000 | ₹20,000 |
| Tax on Normal Income ₹ 8,00,000 | ₹20,000 |
Step 2: Calculate Tax on Special Income (LTCG)
Tax on the taxable LTCG u/s 112A is charged at a flat rate of 12.5 %.
- Taxable LTCG: ₹ 2,00,000
- Tax: 12.5% of ₹2,00,000 = ₹25,000
Step 3: Calculate Total Tax Liability (Before Rebate and Cess)
| Particulars | Amount (₹) |
| Tax on Normal Income (from Step 1) | ₹20,000 |
| Tax on Special Income (from Step 2) | ₹25,000 |
| Total Tax Payable (G) | ₹45,000 |
Step 4: Apply Rebate U/S 87A
The total income ₹11,25,000 is less than the ₹12 lakh limit, so the rebate is available.
CRITICAL POINT: The rebate can only be applied against the tax on Normal Income (₹20,000). It cannot be applied against the tax on LTCG u/s 112A.
- Tax on Normal Income: ₹20,000
- Rebate applied against Normal Income: ₹20,000
- Tax on Normal Income (Post-Rebate): NIL
Step 5: Final Tax Payable
| Particulars | Amount (₹) |
| Total Tax Payable (from Step 3) | ₹ 45,000 |
| Less: Rebate u/s 87A (Applied to Normal Income) | ₹20,000 |
| Net Tax before Health & Education Cess | ₹25,000 |
| Add: Health & Education Cess @ 4% | 4% of ₹25,000 = ₹1,000 |
| NET TAX PAYABLE | ₹26,000 |
In this case, despite the income being ₹11,25,000, the individual is liable to pay ₹26,000 in tax. This entire tax liability comes from the LTCG u/s 112A portion, which is taxed at a special rate of 12.5% and is ineligible for the Section 87A rebate.
This reinforces the principle that the ₹12 lakhtax-free income limit under the New Tax Regime is effectively for income taxed at the normal slab rates, and not for income taxed at special rates
To know about Section 87a of Income Tax Act, CLICK HERE
What other incomes attract Special rates normally?
Apart from capital gains , other income streams that attract special rates include
| Income Type (Section) | Tax Rate on Income | Key Tax Implications |
| Winnings from Lottery, Card Games, Horse Races, Gambling, or Betting (Sec 115BB) | 30% flat | No Deduction/Exemption: No expenses are allowed. The entire winning amount (above ₹10,000 limit for TDS) is taxable at 30%. |
| Winnings from Online Games (Sec 115BBJ) | 30% flat | Tax on Net Winnings: Tax is levied on the Net Winnings (winnings minus entry fees/deposits). No Basic Exemption: The tax is 30% even if your total income is below the basic exemption limit (e.g., ₹4 lakhs in the new regime). |
| Transfer of Virtual Digital Assets (VDAs) / Cryptocurrency Gains (Sec 115BBH) | 30% flat | Only Cost of Acquisition Allowed: You can only deduct the purchase price (cost of acquisition). No Loss Set-Off: Loss from one VDA cannot be set off against profit from another VDA or any other income, nor can it be carried forward. |
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