Budget 2025 does not give Section 87A tax rebate benefit on capital gains, lotteries income

Budget 2025 has clarified that the tax rebate under Section 87A will not be available for income that attracts special rates, such as capital gains, lotteries, and horse race winnings. Currently, under Section 87A of the Income Tax Act, a taxpayer with net taxable income of up to Rs 5 lakh under the old tax regime and up to Rs 7 lakh under the new tax regime was entitled to a tax rebate of Rs 12,500 and Rs 25,000, respectively.

Under the new regime, Budget 2025 proposes a maximum rebate of Rs 60,000 for taxpayers. This would mean taxpayers with incomes of up to Rs 12 lakh will pay zero tax. However, the Union Budget 2025 provisions clarify that no tax rebate under Section 87A is now available on income from capital gains, lotteries, or any other income on which a special rate has been provided in the Income Tax Act. However, as Deepak Joshi, a Supreme Court advocate, says, this amendment is not retrospective in nature.

There is a history behind such a clarification. For FY2023-24, the Income Tax department's ITR filing utility allegedly disabled the Section 87A tax rebate for those filing under the new tax regime from July 5, 2024. The tax rebate was barred in specific cases, such as when a tax was levied at special rates: for example, 15% on short-term capital gains or 10% on long-term capital gains on the sale of equity shares or equity-oriented mutual funds.


In response to a PIL filed by The Chamber of Tax Consultants (CTC), Bombay HC recently held that the ITR filing utility should not prevent taxpayers from making rebate claims, as the correctness of such claims can be examined during the assessment process. In fact, pursuant to an interim order by the High Court in December 2024, the Central Board of Direct Taxes had increased the time limit to filing a revised return to January 15, 2025.

Ketan Vajani, past president of CTC, told TOI, "The proposed amendment is with effect from FY26 and, therefore, implicitly the taxpayers are justified in taking a view that the rebate is available against capital gains for the preceding financial years. Hopefully, tax authorities will follow the correct principle of law while processing income-tax returns for FY24 and FY25. Otherwise, the taxpayers will need to resort to appellate proceedings to get this legitimate benefit."

(with inputs from The Times of India)