The Union Budget 2025 announced zero tax for individuals earning up to Rs 12 lakh by raising the rebate limit under Section 87A. However, you must understand that not all sources of income qualify for the rebate. Income from capital gains, lotteries and other categories taxed at special rates will not be eligible for the rebate.

“…rebate is not available on income from capital gains or lotteries or any other income on which special rate has been provided in the Act. It is available only on the tax payable as per slabs under Section 115BAC,” the tax department answered responding to FAQs.

Under the new tax regime, individuals earning up to Rs 12 lakh can avail of a rebate of Rs 60,000. Currently, the rebate the tax department allows stands at Rs 25,000 applicable for incomes up to Rs 7 lakh. The rebate relief is given to only salaried individuals. So when a rebate is factored in, capital gains and other special-rate incomes are excluded.

For instance, if an individual earns Rs 13 lakh annually, including Rs 3 lakh as long-term capital gains from the sale of listed securities, only Rs 10 lakh would be eligible for regular slab taxation. The Rs 3 lakh in capital gains would be taxed separately at 12.5%, without any rebate benefit. This means the taxpayer will still have to pay tax on that portion of their income, even if their total earnings fall within the rebate threshold.

Clarity on capital gains taxation

This exclusion has been a subject of debate. The Bombay High Court recently ruled that the Income Tax Department should not prevent taxpayers from claiming rebates on special-rate income solely due to software restrictions in the tax filing system. The court said that rebate claims should be assessed during the tax scrutiny process, rather than being blocked outright. Despite this, Budget 2025 has reinforced the government’s stance that capital gains, lottery winnings and similar income sources will not be eligible for the rebate.

Also read: Budget 2025: Earning Rs 12 lakh could mean a bigger take-home salary than Rs 13 lakh? See tax calculations

What taxpayers should keep in mind

Taxpayers should note that only regular income qualifies for rebate benefits. Incomes from salary, interest, and rental income are eligible for the rebate, but capital gains and lottery winnings are taxed separately.

Investors relying on capital gains for income should factor in the tax liability before assuming they fall under the rebate limit. While past rebates may still be claimable, future returns must comply with the clarified provisions of Budget 2025.