Post Budget 2025: Sec 87A Applicability on old & New regime

Post Budget 2025: Applicability of Sec 87A on old & New regimes

In this blog explain the impact of Budget 2025 on the applicability of Section 87A concerning capital gains under both tax regimes. The changes to Section 87A in the Union Budget 2025-26 bring both opportunities and challenges, particularly regarding its applicability to capital gains under the New Tax Regime. Here’s a refined analysis:

1. Under the Old Tax Regime:

• No change in rebate provisions: Taxpayers can still claim the INR 12,500 rebate if their taxable income (after deductions) does not exceed INR 5 lakh.
• There is no change in the scope of rebate for those who file under the old regime.
• Capital Gains and Rebate Applicability:
  • If a Income Tax taxpayer’s total income consists only of capital gains taxed at special rates, rebate under section 87A is not available.
  • If a taxpayer has both slab rate income and capital gains, they can still opt for the old regime if it is beneficial and claim the rebate (provided total taxable income remains within the limit).
  • No change in rebate applicability. Taxpayers can still avail Section 87A rebate even if they have only capital gains or a mix of slab rate income + capital gains, as long as they meet the threshold

• Under the New Tax Regime:

Current Financial year (2024-25) – No Change

• Rebate under Section 87A is applicable for all incomes except LTCG from equity.

Changes from Financial year 2025-26 (AY 2026-27) Onwards

• Rebate is restricted to slab-rate income under Section 115BAC(1A). & Rebate available only for tax computed under slab rates u/s 115BAC(1A)
• Impact on Capital Gains:

Rebate is NOT applicable to any capital gains, including:

1. 1. No rebate on Long-Term Capital Gains from equity (u/s 112A). (taxed at 10% above ₹1 lakh).
   2. No rebate on Short-Term Capital Gains from equity (u/s 111A) (taxed at 15%).
   3. Rebate available on Long-Term Capital Gains from debt funds taxed as per slab rates, but not if taxed at special rates. (taxed at 20% with indexation)
   4. Rebate available on Short-Term Capital Gains from debt funds (as these are taxed at slab rates).

• New rebate limit of INR 12,00,000/- (INR 12,75,000/- for salaried) is only for “normal income”. And Marginal relief available for taxpayers slightly exceeding INR 12,00,000/- but does not cover capital gains.

Impact on Taxpayers with Capital Gains with Example:

1. If total income is only from capital gains (up to INR 12,00,000/-):
   • No rebate under New Tax Regime.
   • Full tax liability at special rates.
2. If income is INR 10,00,000/- salary + INR 1,00,000/- Short-Term Capital Gains (total INR 11,00,000/-):
   • Rebate applies to salary income.
   • Short-Term Capital Gains of INR 1,00,000/- taxed at 15% = INR 15,000.
3. If income is INR 12,75,000/- salary + INR 2,25,000/- Short-Term Capital Gains:
   • Rebate applies to salary.
   • Long-Term Capital Gains taxed separately at 10% (above INR 1,00,000/- limit).

We can say that old regime is still beneficial since the rebate under Section 87A is available & useful in the above case.

Changes in the Union Budget 2024-25 significantly impact investors,

These changes in the Union Budget 2024-25 significantly impact investors, especially those dealing in stocks, mutual funds, and other financial assets. Here’s a quick analysis of their implications:

Long-Term Capital Gains (LTCG)

• Higher Tax Rate (12.5%): Investors will now pay a higher tax on long-term capital gains from equity shares, mutual funds, and other assets. This reduces post-tax returns, making tax planning more critical.
• Increased Exemption Limit (INR 1,25,000/-): The increase in the exemption limit provides some relief to small investors. Gains up to INR 1,25,000/- per year will remain tax-free.
• Revised Holding Periods:
  • Listed Financial Assets: No change—still one year for LTCG classification.
  • Unlisted Financial & Non-Financial Assets: Now requires a holding period of more than two years instead of three, potentially benefiting investors in startups, private companies, and real estate.

Short-Term Capital Gains (STCG)

• Higher Tax Rate (20%): Short-term traders and investors will pay more tax, particularly on equity transactions. This may encourage a shift toward long-term investments to avoid higher taxation.

Securities Transaction Tax

• Futures STT Increase (0.0125% → 0.02%): Higher transaction costs could reduce liquidity in the derivatives market.
• Options STT Increase (0.0625% → 0.1%): Options trading will become more expensive, impacting traders who rely on options for hedging or speculative purposes.

Overall Impact on Investors: Changes in the Union Budget 2024-25

• Investors may shift toward long-term holdings to avoid higher STCG taxes.
• Increased securities transaction tax may reduce trading volumes in futures and options.
• Tax-efficient investment strategies, such as tax harvesting, will become more important.
• HNI and institutional investors may restructure portfolios to optimize post-tax returns.

Unresolved Questions & Need for Clarification:

• Whether rebate will be fully applied to “normal income” when combined with capital gains, or if exceeding INR 12,00,000/-  (including capital gains) will disqualify the taxpayer from rebate.
• Applicability of marginal relief when income includes capital gains.

Key Takeaways on Applicability of Section 87A & Capital Gains on Old & New regimes:

• Old regime remains preferable for those with special-rate capital gains below INR 5,00,000/-.
• Taxpayers who do not have any other income other than capital gains calculated under special rates, or the tax payers having a mix of slab rate incomes and special rate incomes, can still opt for old regime in Financial Year 2025-26, if they fall under the limits and if the same is beneficial for them, as they can avail the rebate under Section 87A under old regime as before.
• The new regime post-financial year 2025-26 limits rebates only to slab-based incomes, making it less attractive for individuals relying on capital gains.

Conclusion: The Old Tax regime remains more beneficial for those with capital gains. The new Tax regime favors salaried taxpayers without capital gains. Clarity from the Tax Dept. is required on mixed-income scenarios to maximize tax benefits

Key Documents for your Full Read, the Budget 2025

The Union Budget 2025-2026, presented by Finance Minister Nirmala Sitharaman on February 1, 2025, encompasses several key documents that provide comprehensive insights into the government’s financial plans and policies. Here are the primary documents for your reference:

1. Finance Bill 2025: This bill outlines the legal amendments required to implement the budget’s financial proposals. Finance Bill 2025

2. Finance Minister’s Speech: The speech delivered by the Finance Minister during the budget presentation, detailing the government’s economic agenda and key initiatives. Finance Minister’s Speech

3. Memorandum Explaining the Provisions in the Finance Bill: This document provides detailed explanations of the provisions included in the Finance Bill. Memorandum Explaining the Provisions in the Financial Bill

4. Key to Budget Document, 2025: A guide that explains the structure and components of the budget documents, aiding in their understanding.Key to Budget Document, 2025

5. Budget Highlights (Key Features): A summary of the main features and initiatives proposed in the budget. Budget Highlights (Key Features)

6. Expenditure Budget (Full): A comprehensive account of the government’s expenditure across various ministries and departments. Expenditure Budget (Full)