Taxable income below Rs 12 lakh: Will you pay zero income tax if this income includes LTCG and STCG for Tax Year 2026-27?

Incomes that are charged at a special rate, like long term capital gains and short term capital gains from listed equities, aren’t eligible for the Section 87A tax rebate to reduce income tax liability. But Indian residents and Hindu Undivided Families (HUFs) can benefit from the Rs 4 lakh basic exemption limit under the new tax regime, which helps in lowering capital gain tax liabilities.

Under the Income Tax Act, 2025, this provision has not been removed, this means that using the basic exemption limit to reduce capital gains tax liability is still an option for Tax Year 2026-2027.

Chartered Accountant Suresh Surana says that resident individuals or a resident Hindu Undivided Family (HUF) can use the unused basic exemption limit against certain capital gains that attract a special tax rate such as short-term capital gains on specified listed securities as well as long-term capital gains covered by the special capital-gains provisions. However, non-residents, firms and companies cannot claim this adjustment.

How does it work for Indian residents?

Shanmuga Prasad, Tax Partner, EY said to ET Wealth Online that a common misconception among taxpayers is that capital gains taxable at special rates, such as STCG and LTCG, cannot benefit from the basic exemption limit. However, resident taxpayers can utilise any unabsorbed portion of the basic exemption limit against eligible capital gains, thereby reducing their overall tax liability.

The Income-tax Act, 2025 largely continues the principles that existed under the earlier law. Accordingly, where a resident individual's total income, excluding such capital gains, is below the applicable basic exemption threshold, the exemption limit is first applied against income taxable at normal slab rates under both the old and the new tax regimes.

Prasad says that any remaining unutilised portion of the exemption limit may then be adjusted capital gains that would otherwise be subject to special rates of taxation, provided the taxpayer is a resident individual or a Hindu Undivided Family (HUF).

For example, where interest income is Rs 2lakh and capital gains total Rs 2.5 lakh (taxable at special rate), against a basic exemption limit of Rs 4 lakh (under new tax regime), the unutilised basic exemption of Rs 2 lakh (after adjustment of interest income of Rs 2 lakh) can be set off against the capital gains. As a result, only the balance Rs 50,000 would remain taxable at the applicable special rate.

Surana says: “Sections 196(2), 197(2) and 198(3) of the Income-tax Act, 2025 (corresponding to sections 111A, 112 and 112A of the Income-tax Act, 1961 respectively) specifically provide this benefit.”

For FY 2025–26 (AY 2026–27), the basic exemption limit under the default new tax regime is Rs 4 lakh. Under the old tax regime, the limit is Rs 2.5 lakh for a resident individual below 60 years of age and an HUF, Rs 3 lakh for a resident senior citizen aged 60 years or more but below 80 years, and Rs 5 lakh for a resident individual aged 80 years or more.

Example showing how to use basic exemption limit to reduce capital gain tax liability:

For example, assume that Mr. A, a 35-year-old Indian resident, earns interest income of Rs 1.5 lakh and short-term capital gains of Rs 4 lakh from listed equity shares (under Section 111A). The applicable special tax rate on such gains is 20%.

Particulars	Old tax regime(Rs)	New tax regime(Rs)
Basic exemption limit	2,50,000	4,00,000
Less: Interest income	(1,50,000)	(1,50,000)
Unused basic exemption limit	1,00,000	2,50,000
Short-term capital gain under section 111A	4,00,000	4,00,000
Less: Unused basic exemption limit	(1,00,000)	(2,50,000)
STCG taxable at 20%	3,00,000	1,50,000
Income tax at 20%	60,000	30,000
Health and education cess at 4%	2,400	1,200
Total tax liability	62,400	31,200

Source: CA Suresh Surana

Conditions to follow for using basic exemption limit to reduce capital gains tax liability

The benefit of basic exemption is not available in every case. Surana says that the following conditions must be satisfied:

• The taxpayer must be deriving the capital gains from the relevant Sections (as aforementioned) and must be a resident individual or a resident HUF. Non-residents, firms and companies cannot make this adjustment.
• The income excluding such capital gains should be below the applicable basic exemption limit. The adjustment is available only to the extent of the shortfall between the basic exemption limit and the taxpayer's total income excluding such capital gains.
• Only the unutilised portion of the basic exemption limit can be adjusted. If the basic exemption limit is already fully exhausted by normal income, no further adjustment against capital gains is available.
• The adjustment is available under both the old and new tax regimes. However, the amount of relief may differ because the basic exemption limit varies depending on the tax regime and assessment year.

The following table summarises the holding period and tax rates applicable to an individual resident in India for FY 2025–26 (AY 2026–27) in case of key capital assets as follows:

Capital asset	Holding period for long-term classification	Short-term capital-gains rate	Long-term capital-gains rate
Land or building or both	More than 24 months	Normal slab rate	12.5% without indexation*
Physical gold and jewellery	More than 24 months	Normal slab rate	12.5% without indexation
Digital gold representing underlying physical gold	More than 24 months	Normal slab rate	12.5% without indexation
Gold ETF listed on a recognised stock exchange	More than 12 months	Normal slab rate	12.5% without indexation
Listed equity shares, Equity Oriented Mutual Funds and Units of a Business Trust on which STT is applicable	More than 12 months	20% under section 111A	12.5% under section 112A on aggregate gains exceeding Rs. 1.25 lakh
Unlisted equity shares	More than 24 months	Normal slab rate	12.5% without indexation
Specified mutual fund** units acquired on or after 1 April 2023	Not applicable; gains always qualify as short-term under section 50AA	Normal slab rate, irrespective of holding period	Not applicable
Debt mutual fund units acquired before 1 April 2023	More than 12 months if listed; more than 24 months if unlisted	Normal slab rate	12.5% without indexation
Other mutual funds that do not qualify as equity-oriented or specified debt funds	More than 12 months if listed; more than 24 months if unlisted	Normal slab rate	12.5% without indexation
Listed bonds and debentures	More than 12 months	Normal slab rate	12.5% without indexation
Unlisted bonds and debentures	Not applicable; gains always qualify as short-term under section 50AA	Normal slab rate, irrespective of holding period	Not applicable
Market-linked debentures	Not applicable; gains always qualify as short-term under section 50AA	Normal slab rate, irrespective of holding period	Not applicable

Source: CA Suresh Surana

*Note: Where a resident individual or HUF transfers a long-term capital asset being land or building, or both, acquired before 23 July 2024, the taxpayer may opt for taxation at 12.5% without indexation or 20% with indexation, whichever results in a lower tax liability.

**Note: With effect from 1 April 2025, Section 50AA of ITA 1961 defines a "Specified Mutual Fund" as:

(a) a mutual fund, by whatever name called, that invests more than 65% of its total proceeds in debt and money market instruments; or

(b) a fund that invests 65% or more of its total proceeds in units of such Mutual fund.

Note: The above rates are exclusive of applicable surcharge and health & education cess. "Slab rates" refer to taxation at the normal income-tax rates applicable to the taxpayer based on his total income.