Does the ₹12 Lakh Rebate (Old Section 87A) Cover Capital Gains?

Many salaried investors assume that because salary up to ₹12.75 lakh is tax-free in the new regime, a few lakh of share profits will be too. They aren't, and the gains can also take away the rebate on your salary. This article explains both rules for FY 2026-27 with examples worked out in our capital gains calculator.

Short answer

No. The ₹12 lakh rebate (Section 156 of the Income-tax Act, 2025, earlier Section 87A) never reduces tax on equity capital gains: short-term gains are taxed at 20% and long-term gains at 12.5% above ₹1.25 lakh, plus 4% cess. And because the ₹12 lakh limit is tested on total income including capital gains, gains that take you above it also cost you the rebate on your salary.

Rule 1: tax on capital gains is always payable

The rebate only reduces tax on income taxed at normal slab rates, such as salary, interest, rent and F&O or intraday profit. Gains taxed at special rates are outside it:

So if your salary is ₹10 lakh and you book ₹2 lakh of long-term gains, your salary tax is wiped out by the rebate (total income is ₹11.25 lakh after the standard deduction, within the limit), but you still pay 12.5% on the ₹75,000 above the ₹1.25 lakh exemption: ₹9,750 including cess.

Rule 2: gains count towards the ₹12 lakh limit

To get the rebate, your total income must be ₹12 lakh or less, and total income includes capital gains. A salary of ₹12.75 lakh is ₹12 lakh after the ₹75,000 standard deduction, exactly at the limit. Add gains on top and you're over it:

₹2 lakh of long-term gains costs ₹72,150 here, not just the ₹9,750 of LTCG tax, because the salary loses its rebate.

Marginal relief when you're just above ₹12 lakh

If total income is only slightly above ₹12 lakh, marginal relief stops the jump from being unfair: your total tax can't be more than the income above ₹12 lakh. The relief comes only out of the tax on your salary, never out of the tax on the gains.

Example: ₹10,000 of short-term gains

With a ₹12.75 lakh salary and ₹10,000 of STCG, total income is ₹12.10 lakh, just ₹10,000 above the limit. Without relief you would pay ₹62,400 on the salary plus ₹2,080 on the gains. With relief, total tax is capped at the ₹10,000 excess plus cess: ₹10,400.

Example: ₹50,000 of short-term gains

Total income is ₹12.50 lakh, ₹50,000 over the limit. The gains carry ₹10,400 of tax; relief brings the salary tax down to ₹41,600, so the total is ₹52,000, again the excess plus cess.

Once the gains are large enough that the normal tax is below the excess, relief stops applying, as in the ₹2 lakh and ₹1 lakh examples above.

What this means for your planning

• Near ₹12 lakh, timing matters. Selling shares in a year when your salary is already at the limit can cost far more than the gains tax alone. Spreading sales over two financial years may keep you under it.
• Use the ₹1.25 lakh LTCG exemption carefully. It removes the 12.5% tax on the gain, but the gain still counts towards total income for the rebate test.
• Plan for the tax. Your employer's TDS doesn't include capital gains, so pay advance tax or self-assessment tax before you file.
• The old regime works the same way with its own limit: total income of ₹5 lakh, with a rebate of up to ₹12,500.

For how the rebate and marginal relief work on salary alone, see the Section 156 rebate guide. For rates, holding periods and losses, see capital gains tax on shares and F&O.

Sources

• Income Tax Department: Section 156
• Income Tax Department: Section 196 and Section 198
• Section 87A rebate and capital gains, FY 2025-26 onwards (FirstReports)