Old vs New Tax Regime FY 2025-26: Rs 62,400 87A Trap
Tax & Investing
Old vs New Tax Regime FY 2025-26: The Rs 62,400 Demand Notice Trap Every Salaried Indian Must Know
Section 87A makes salary income up to Rs 12 lakh tax-free under the New Regime — but capital gains can still trigger a demand notice. The complete decision framework, plus a free interactive calculator covering FY 2023-24 through FY 2025-26.
- For FY 2025-26, the New Tax Regime makes gross salary up to Rs 12.75 lakh effectively zero-tax due to a Rs 60,000 Section 87A rebate plus Rs 75,000 standard deduction. Above Rs 12.75L, marginal rates of 10 to 25 per cent stay lower than the Old Regime's 30 per cent above Rs 10L.
- The Old Regime still wins when HRA + 80C + 80D + home loan interest deductions exceed approximately Rs 4 lakh above the standard deduction. Typically a metro renter with an active home loan and tax-saving investments at the cap.
- Section 87A does NOT cover tax on capital gains — a Rs 3 lakh STCG trade can trigger a Rs 62,400 demand notice even if you think you owe nothing. A Rs 10L salary plus Rs 3L STCG = Rs 62,400 payable. Verified by CBDT Circular No. 13/2025.
A Bengaluru product manager filed her FY 2024-25 ITR last August convinced she owed nothing. Gross salary Rs 10 lakh, equity mutual fund redemptions Rs 3 lakh, total income Rs 13 lakh on paper, but she had read that the New Regime made Rs 12 lakh of income tax-free under Section 87A. She filed showing zero tax payable. Three months later the income tax department issued a demand notice for Rs 62,400 plus interest under Sections 234B and 234C.
She is not alone. The same Section 87A misunderstanding generated more demand notices in AY 2024-25 than any other single filing error tracked by tax-filing platforms. The fix is not complicated, but the underlying mechanic is counter-intuitive enough that millions of salaried Indians will repeat the same mistake when AY 2026-27 returns open this filing season.
This article rebuilds the regime decision from first principles using verified FY 2025-26 numbers, walks through the exact Rs 62,400 calculation that traps equity investors, and offers a free interactive calculator covering FY 2023-24, FY 2024-25 (with the 23 July 2024 split-rate logic), and FY 2025-26. The non-audit ITR deadline is 31 July 2026. The numbers below were verified against Finance Act 2025, CBDT Circular No. 13/2025, and the income tax portal's own computation engine.
What changed in FY 2025-26 (and why last year's calculators give wrong answers)
The New Regime is now the default under Section 115BAC. For FY 2025-26 (AY 2026-27), the New Tax Regime applies automatically unless you explicitly opt into the Old Regime when filing your ITR. Salaried individuals without business income can switch each year, but the opt-in must be made before the filing deadline. Missing it locks you into the New Regime for that assessment year regardless of which one would have saved you more tax.
Three numbers shifted under Finance Act 2025. The standard deduction for salaried taxpayers under the New Regime rose to Rs 75,000 (from Rs 50,000 under FY 2023-24). The Section 87A rebate ceiling under the New Regime increased to Rs 60,000 for taxable income up to Rs 12 lakh (from Rs 25,000 for income up to Rs 7 lakh under FY 2023-24 and FY 2024-25). The slabs themselves were widened, with the 30 per cent rate now starting only above Rs 24 lakh of taxable income instead of Rs 15 lakh. Together, these three changes push the effective zero-tax salary threshold to Rs 12.75 lakh.
Why prior-year tax calculators give wrong answers. Any calculator using FY 2023-24 or FY 2024-25 parameters will materially understate the New Regime's advantage for FY 2025-26. The combined effect of the slab restructuring, the higher standard deduction, and the Rs 60,000 rebate is not incremental tweaking. It makes salary income up to Rs 12 lakh genuinely zero-tax for the first time, not merely lightly taxed. Before relying on any third-party tool, verify it specifies FY 2025-26 or AY 2026-27. The calculator further down this page covers all three recent financial years and applies the correct rule-set to each.
The two regimes side-by-side
The slab structures for FY 2025-26 are set out below in two clean tables: New Regime slabs on the left, Old Regime slabs on the right. Cess of 4 per cent applies on tax in both regimes. Surcharge applies above Rs 50 lakh taxable income (10 per cent above Rs 50L, 15 per cent above Rs 1 Cr, 25 per cent above Rs 2 Cr, 37 per cent above Rs 5 Cr) with the New Regime capping surcharge at 25 per cent.
| Taxable Income | Rate |
|---|---|
| Up to Rs 4 lakh | 0% |
| Rs 4 to 8 lakh | 5% |
| Rs 8 to 12 lakh | 10% |
| Rs 12 to 16 lakh | 15% |
| Rs 16 to 20 lakh | 20% |
| Rs 20 to 24 lakh | 25% |
| Above Rs 24 lakh | 30% |
| Std deduction Rs 75,000. 87A rebate Rs 60,000 for taxable income up to Rs 12L. | |
| Taxable Income | Rate |
|---|---|
| Up to Rs 2.5 lakh | 0% |
| Rs 2.5 to 5 lakh | 5% |
| Rs 5 to 10 lakh | 20% |
| Above Rs 10 lakh | 30% |
| Std deduction Rs 50,000. 87A rebate Rs 12,500 for taxable income up to Rs 5L. | |
What the Old Regime allows that the New Regime does not. The Old Regime permits a range of deductions disallowed under the New Regime: HRA exemption under Section 10(13A) for rent paid, Section 80C investments up to Rs 1.5 lakh (PPF, ELSS mutual funds, life insurance premiums, home loan principal), Section 80D health insurance premiums up to Rs 25,000 for self and family or Rs 50,000 if covering senior citizen parents, Section 24(b) home loan interest deduction up to Rs 2 lakh for self-occupied property, and Section 80CCD(1B) NPS contribution up to Rs 50,000. The standard deduction under the Old Regime stays at Rs 50,000.
What the New Regime offers in return. A higher standard deduction of Rs 75,000, a substantially higher rebate, lower marginal rates in the Rs 12 to 24 lakh band, and freedom from mandatory tax-saving investments. For salaried readers without significant rent or home loan deduction stacks, the New Regime now consistently delivers lower tax with no behavioural requirements attached.
Where the breakeven sits. The practical breakeven is in the Rs 3.5 to 4.5 lakh deduction range beyond the standard deduction. If your HRA claim, 80C investments, 80D premiums, and home loan interest together exceed approximately Rs 4 lakh after accounting for the Rs 25,000 standard deduction difference, the Old Regime warrants a full comparison calculation. Below that threshold, the New Regime almost always wins for FY 2025-26.
The decision framework: four salaried profiles
Rather than a theoretical breakeven chart, here are four common salary profiles resolved with a clear direction. Use the calculator below for borderline cases.
Standard deduction Rs 75K is your only offset. Tax-free up to Rs 12.75L. For income above Rs 12.75L, the New Regime's 15 to 25 per cent marginal rates beat the Old Regime's flat 30 per cent above Rs 10L. Verdict is clear unless 80C plus 80D together exceed Rs 1.75L, which is rare in early careers.
Available deductions: Rs 50K standard plus Rs 2L 24(b) plus Rs 1.5L 80C plus Rs 25K 80D plus Rs 50K NPS plus HRA. Total can reach Rs 6 to 7L. For Rs 15 to 22L income, the Old Regime frequently wins when the deduction stack is genuine and fully utilised year after year.
The borderline case. If total deductions beyond the standard deduction come to Rs 2 to 3.5L, the regimes are close enough that exact arithmetic matters. The calculator below handles this range precisely for any of FY 2023-24, FY 2024-25, or FY 2025-26.
The regime choice is secondary for this profile. Before selecting either regime, understand the Section 87A carve-out for capital gains. Filing incorrectly in either regime triggers demand notices regardless of which one you pick. See the next section.
The jump from Rs 7 lakh to Rs 12 lakh in the Section 87A threshold, compressed into a single Budget cycle, is not incremental policy adjustment. It is a deliberate structural shift designed to make the New Regime the obvious default for the majority of salaried India, accelerating the government's stated objective of simplifying the direct tax code. For a household earning Rs 12 lakh of salary, the FY 2025-26 saving versus the Old Regime (without major deductions) is roughly the size of one month's take-home, material enough to influence behaviour.
The Section 87A + Capital Gains Trap: How a Rs 10L Salary Triggers a Rs 62,400 Demand Notice
What the rebate actually covers. The Section 87A rebate of Rs 60,000 under the New Regime (and Rs 12,500 under the Old Regime) applies against tax computed at normal slab rates on ordinary income: salary, interest, business income, rental income. It does not apply to tax on income taxed at special rates under Sections 111A, 112, or 112A. The proviso to Section 87A read with Section 115BAC(1A) makes this explicit. CBDT Circular No. 13/2025 dated 19 September 2025 restated the position formally after a pattern of incorrect filings emerged in AY 2024-25.
Which income types are excluded from the Section 87A rebate. For FY 2025-26, the excluded categories are: Short-Term Capital Gains on listed equity shares and equity mutual funds under Section 111A (taxed at 20 per cent, raised from 15 per cent by Finance Act 2024 effective 23 July 2024); Long-Term Capital Gains on listed equity shares and equity mutual funds under Section 112A (taxed at 12.5 per cent above the Rs 1.25 lakh annual exemption, raised from 10 per cent and Rs 1 lakh by Finance Act 2024 from 23 July 2024); and Long-Term Capital Gains on other assets under Section 112 (taxed at 12.5 per cent without indexation).
Many secondary articles still cite STCG at 15 per cent and LTCG at 10 per cent. These are pre-23-July-2024 rates. Finance Act 2024 split FY 2024-25 into two periods: gains realised before 23 July 2024 use the old 15 per cent / 10 per cent rates; gains realised from 23 July 2024 onwards use 20 per cent / 12.5 per cent. FY 2025-26 is entirely under the new 20 per cent / 12.5 per cent regime. The calculator below applies the correct rule for whichever FY you select.
The Section 87A threshold test applies to normal-rate income, not total income with capital gains. This is the operative mechanic and the source of widespread confusion. The Rs 12 lakh threshold for 87A eligibility under the New Regime checks taxable income at normal slab rates only: taxable salary, interest income, business income. Capital gains taxed at special rates under Sections 111A, 112, and 112A are not added to that threshold calculation. This is the dominant CA practice and how the income tax portal itself processes returns. Strict statutory reading would arguably include all components of "total income," but the prevailing professional interpretation, supported by CBDT Circular No. 13/2025 read holistically, is the normal-rate threshold. Verify with your own Chartered Accountant before filing.
The Rs 62,400 worked example. A salaried reader earns Rs 10 lakh gross salary during FY 2025-26 and realises Rs 3 lakh in Short-Term Capital Gains from listed equity mutual funds. Here is the exact computation that the income tax portal will produce.
Gross salary: Rs 10,00,000 | STCG (listed equity): Rs 3,00,000
Step 1 — Taxable salary: Rs 10,00,000 minus Rs 75,000 standard deduction = Rs 9,25,000
Step 2 — 87A eligibility check (on normal-rate income only): Taxable salary Rs 9,25,000 is below the Rs 12,00,000 ceiling. Section 87A rebate IS available for the salary tax component.
Step 3 — Slab tax on Rs 9.25L (New Regime): Rs 20,000 (5 per cent on Rs 4 to 8L band) + Rs 12,500 (10 per cent on the Rs 8 to 9.25L band) = Rs 32,500
Step 4 — Apply Section 87A rebate: min(Rs 32,500 slab tax, Rs 60,000 rebate cap) = Rs 32,500. Salary tax netted to Rs 0.
Step 5 — Tax on STCG at 20 per cent (Section 111A): Rs 3,00,000 × 20 per cent = Rs 60,000. The 87A rebate does NOT cover this.
Step 6 — Health & Education Cess at 4 per cent on Rs 60,000: Rs 2,400
Total tax demand: Rs 0 (salary) + Rs 60,000 (STCG) + Rs 2,400 (cess) = Rs 62,400
Common misfiling belief: "My salary alone is under Rs 12L, so the rebate wipes out my entire tax, including capital gains." This is wrong. The rebate covers only the salary slab tax. STCG is taxed separately and pays full Rs 62,400 demand. Plus interest under Sections 234B and 234C if filed late.
The Section 87A carve-out for capital gains is one of those rules that reads obvious once explained, but feels surprising at first encounter because the rebate ceiling and the rebate's coverage scope are two separate questions. The ceiling test asks "is your taxable salary low enough to qualify?" The coverage scope asks "what tax does the rebate actually offset?" Salaried filers who read the headline "Rs 12L tax-free under New Regime" naturally assume both questions are answered together. They are not. Anyone with even a single equity mutual fund redemption in the financial year must compute the salary tax and the capital gains tax as two separate buckets, with the rebate eligible to touch only the first.
Rs 62,400 in tax demand — for someone who genuinely believed they owed nothing. The Section 87A rebate covers your salary slab tax. It does not reach capital gains.
Try the calculator: enter your numbers below
The calculator below is the same tool that lives permanently at thefinestate.com/p/tools.html. It computes tax under both regimes for the financial year you select, applies the Section 87A rebate correctly (with the capital gains carve-out and the 23 July 2024 split-rate logic for FY 2024-25), and recommends the regime that produces lower tax. All figures in Indian Rupees (Rs).
Multi-FY Tax Regime Calculator
Compare New vs Old Regime for FY 2023-24, FY 2024-25, or FY 2025-26. Applies Section 87A rebate, capital gains carve-out, and surcharge brackets automatically.
This calculator is for illustrative purposes only. It uses estimated basic salary (40 per cent of gross) for HRA calculation. Marginal relief on surcharge thresholds is not modelled. Results do not constitute tax advice. Consult a Chartered Accountant for your specific situation. Use the official tax calculator at incometaxindia.gov.in for filing decisions.
The calculator above and the official income tax portal both apply the Section 87A threshold check on normal-rate income, not on total income including capital gains. This is the practical interpretation that determines how your return is actually processed. If you find a third-party calculator that fails the Rs 10L salary plus Rs 3L STCG = Rs 62,400 test, treat its other outputs with caution. The arithmetic of this single test case is the cleanest way to distinguish a correctly-built tool from a flawed one.
Three common filing mistakes that trigger demand notices
Mistake 1: Not opting into the Old Regime when it would save you money. Because the New Regime is the default for FY 2025-26, salaried individuals who would benefit from the Old Regime must actively elect it on the ITR form. If you have calculated that the Old Regime saves you tax, and your deductions are genuine and documentable, do not assume the portal will infer your preference. Select Old Regime explicitly. Missing this cannot be corrected without filing a revised return within the permitted window.
Mistake 2: Applying the Section 87A rebate to capital gains tax. This is the most consequential error of the current filing season. Even a single equity mutual fund redemption generating Rs 50,000 in STCG means Rs 10,000 in capital gains tax is payable, regardless of total income level, regardless of regime choice. The ITR portal handles this correctly if all data is entered in Schedule CG. The risk arises when returns are filed by estimation, or when third-party tools fail to implement the carve-out, or when the salaried filer assumes their salary-only zero-tax position covers the whole return.
Mistake 3: Using a prior-year tax calculator. The New Regime in FY 2025-26 is materially different from FY 2023-24 and even FY 2024-25. The Rs 60,000 rebate and Rs 12 lakh threshold are Budget 2025 provisions. Any tool that shows "New Regime" as the option with a Rs 25,000 rebate or a Rs 7 lakh threshold is working from outdated parameters. Verify the tool's AY specification before relying on the output. The calculator on this page (and at thefinestate.com/p/tools.html) covers all three recent FYs with the correct rule-set applied automatically.
The Section 87A demand notice pattern from AY 2024-25 was disproportionately concentrated among salaried individuals who hold equity mutual funds as a long-term investment, not active traders. These are precisely the readers who do not consider themselves "equity investors" in the sense that would prompt them to check the capital gains schedule carefully. If you received any mutual fund redemption proceeds during FY 2025-26, verify the AIS data on your income tax portal login before filing. STCG and LTCG classification depends on holding period, not on how you think of yourself as an investor.
The first Rs 12.75 lakh of salary is genuinely tax-free under the New Regime for FY 2025-26. The catch is that "salary" and "total income" are not the same number the moment you sell a single mutual fund unit.
The Rs 12.75 lakh tax-free salary is real. The Rs 12.75 lakh tax-free total income is a myth that costs equity investors thousands every filing season.
Bottom line: who wins, and what to file
The Old vs New Regime decision is now resolvable for most salaried filers without professional assistance, provided you are working with FY 2025-26 numbers. The New Regime wins for a clear majority of salary-only or lightly-deducted filers, particularly at income levels up to Rs 20 lakh where the 15 to 25 per cent marginal rate bands deliver substantial savings over the Old Regime's uniform 30 per cent above Rs 10 lakh. The Old Regime retains a genuine case for filers with a full stack of deductions, namely an active home loan with an HRA claim plus 80C and 80D at or near their ceilings, typically in the Rs 15 to 22 lakh income range.
The capital gains carve-out is the one complication that applies across both regimes and across all income levels. If you sold equity shares or redeemed equity mutual fund units at any point during FY 2025-26, verify your AIS data, populate Schedule CG accurately, and do not manually override the tax computation on capital gains income. The Section 87A rebate is valuable; claiming it on income it does not cover is the fastest way to convert a zero-tax year into a demand-notice year.
Bottom Line
The New Regime is the better choice for most salaried Indians earning up to Rs 20 lakh with limited deduction stacks in FY 2025-26. The effective tax-free threshold of Rs 12.75 lakh under the New Regime is a genuine policy shift, not just a headline. Use the FinEstate Tools calculator to verify your specific situation against any of FY 2023-24, FY 2024-25, or FY 2025-26.
For equity investors, regardless of regime, the Section 87A carve-out confirmed in CBDT Circular 13/2025 means capital gains tax is payable separately even when the salary slab tax is zero. The Rs 62,400 demand on a Rs 10L salary + Rs 3L STCG profile is the canonical illustration. Declare all capital gains in Schedule CG before 31 July 2026.
Key Takeaways
- The New Tax Regime is the default for FY 2025-26 (AY 2026-27). To use the Old Regime, you must opt in explicitly when filing your ITR before 31 July 2026.
- Under the New Regime, gross salary income up to Rs 12.75 lakh is effectively zero-tax (Rs 75,000 standard deduction plus Rs 60,000 Section 87A rebate).
- The Section 87A threshold check applies to normal-rate income only (taxable salary, interest, business income). Capital gains taxed at special rates do NOT enter the threshold calculation. This is how the income tax portal itself processes returns.
- The Section 87A rebate does NOT cover tax on STCG (Section 111A), LTCG (Section 112A or 112), or any income taxed at special rates. CBDT Circular No. 13/2025 confirmed this position formally.
- For FY 2025-26, STCG on listed equity is taxed at 20 per cent and LTCG at 12.5 per cent above Rs 1.25 lakh, with no rebate available. A Rs 10L salary plus Rs 3L STCG triggers a Rs 62,400 demand.
- FY 2024-25 had a split-rate transition on 23 July 2024: pre-split STCG taxed at 15 per cent, post-split at 20 per cent; LTCG split correspondingly. The calculator handles both periods.
- The Old Regime is worth calculating only when combined deductions beyond the standard deduction exceed approximately Rs 4 lakh, typically requiring metro city rent, an active home loan, and 80C and 80D maxed.
Frequently Asked Questions
What is the effective tax-free income limit under the New Regime for FY 2025-26?
For salaried individuals, the effective tax-free limit under the New Tax Regime for FY 2025-26 is Rs 12.75 lakh in gross salary. The derivation: Rs 12.75 lakh gross salary minus Rs 75,000 standard deduction equals Rs 12,00,000 taxable income, against which the Section 87A rebate of Rs 60,000 zeroes out the full slab tax liability. This applies to salary income at normal rates; capital gains taxed under Sections 111A, 112, and 112A are not covered by this rebate.
Does the Rs 12 lakh Section 87A rebate apply to capital gains income?
No. The Section 87A rebate applies only to tax on income at normal slab rates. Tax on Short-Term Capital Gains under Section 111A (20 per cent), Long-Term Capital Gains under Section 112A (12.5 per cent above Rs 1.25 lakh), and Long-Term Capital Gains under Section 112 (12.5 per cent) is not eligible for the rebate. CBDT Circular No. 13/2025 dated 19 September 2025 confirmed this position formally. A salaried filer with Rs 10 lakh salary and Rs 3 lakh STCG owes Rs 62,400 in tax even though the salary tax alone would be zero after the rebate.
Does the Rs 12 lakh threshold for the Section 87A rebate include my capital gains?
No, per the prevailing CA practice and how the income tax portal itself processes returns. The Rs 12 lakh threshold check applies to taxable income at normal slab rates (salary, interest, business income). Capital gains taxed at special rates under Sections 111A, 112, and 112A are not added to this threshold calculation. The dominant professional interpretation, supported by CBDT Circular No. 13/2025 read holistically, is the normal-rate threshold. Verify with your own Chartered Accountant.
How do I switch from the New Regime to the Old Regime when filing my ITR for FY 2025-26?
For salaried individuals without business income, you can select the Old Regime at the time of filing your ITR (ITR-1 or ITR-2). The forms include an explicit option to opt out of the New Regime. This choice can be made or changed each year before the filing deadline (31 July 2026 for non-audit filers for AY 2026-27).
Which tax regime is better for a salaried person earning Rs 15 lakh in FY 2025-26?
At Rs 15 lakh, the New Regime typically wins unless total deductions beyond the standard deduction exceed Rs 4.5 to 5 lakh. Under the New Regime, tax on Rs 14.25L taxable income (Rs 15L minus Rs 75K standard deduction) is approximately Rs 93,750 before cess, or Rs 97,500 after the 4 per cent cess. If you have a significant home loan, HRA claim, and 80C and 80D maxed, calculate both precisely before filing.
How are STCG and LTCG taxed for FY 2024-25 given the 23 July 2024 rate change?
Finance Act 2024 split FY 2024-25 into two periods. Equity STCG realised before 23 July 2024 is taxed at 15 per cent under Section 111A; STCG realised on or after 23 July 2024 is taxed at 20 per cent. Equity LTCG realised before 23 July 2024 is taxed at 10 per cent above the Rs 1 lakh exemption; LTCG realised on or after 23 July 2024 is taxed at 12.5 per cent above the Rs 1.25 lakh exemption.
Primary Sources
- Income Tax Department: Tax Rates as amended by Finance Act 2025 (PDF)
- Finance Act, 2025: Full Text (incometaxindia.gov.in)
- Finance Act, 2024: Full Text (STCG and LTCG rate revisions effective 23 July 2024)
- CBDT Circular No. 13/2025 dated 19 September 2025: Section 87A and special-rate income
- Income Tax Department: Official Old vs New Regime Tax Calculator
- Income Tax Department Portal: AIS, Form 26AS, ITR filing
- Union Budget 2025: Finance Bill 2025 (indiabudget.gov.in)
SEBI Non-Advisory Disclosure
This article is for informational and educational purposes only. FinEstate is not a SEBI-registered investment adviser. Nothing in this article constitutes investment advice, tax advice, or a recommendation to buy, sell, or hold any financial product. Tax laws are subject to change. Readers must verify all information with primary sources (CBDT, incometaxindia.gov.in) and consult a Chartered Accountant for personalised tax planning. Worked examples are illustrative only.
AI-Assistance Disclosure
This article was researched and drafted with assistance from an AI language model. All tax figures, legislative references, slab rates, and CBDT circular citations were verified against primary sources at incometaxindia.gov.in and indiabudget.gov.in before publication. The editorial team takes full responsibility for factual accuracy.
Editorial Note
FinEstate earns revenue through display advertising (Google AdSense). This article contains no sponsored content and no affiliate links. All product and service references are editorial and independent. The calculator on this page is open in source and uses no external libraries.
Get FinEstate's weekly tax-and-money briefing on Telegram: market moves, tax updates, and macro briefs before they make headlines. Free, no spam.
Join FinEstate on Telegram
Comments
Post a Comment