Updated 2 June 2026. Figures verified against Finance Act 2025 and CBDT Circular No. 13/2025.
For FY 2025-26, the New Tax Regime makes gross salary up to Rs 12.75 lakh effectively zero-tax — a Rs 60,000 Section 87A rebate plus a 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 9.25L salary plus Rs 3L STCG = Rs 62,400 payable. Verified by CBDT Circular No. 13/2025.
This applies to you if
- You are salaried, filing for AY 2026-27, and have not yet decided which regime to elect.
- You rent in a metro and service a home loan, so your deduction stack is large enough to be worth calculating.
- You sold listed equity or redeemed equity mutual fund units during FY 2025-26.
- You are relying on a tax calculator built for FY 2023-24 or FY 2024-25 parameters.
A Bengaluru product manager filed her FY 2024-25 ITR last August convinced she owed nothing. Gross salary Rs 9.25 lakh, equity mutual fund redemptions Rs 3 lakh, total income Rs 11.5 lakh after the standard deduction, and 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 and walks through the exact Rs 62,400 calculation that traps equity investors. 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
- Old vs new tax regime: the two slab structures
- What each regime allows, and where the breakeven sits
- The decision framework: four salaried profiles
- Why the sorting has been stable
- What the Section 87A rebate actually covers
- Why capital gains count towards the Rs 12 lakh threshold
- The Rs 62,400 worked example
- Three common filing mistakes that trigger demand notices
- Who wins, and what to file
What changed in FY 2025-26
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.
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Old vs new tax regime: the two slab structures
The slab structures for FY 2025-26 are set out below. 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 | New Regime — FY 2025-26 | Old Regime — FY 2025-26 |
|---|---|---|
| Up to Rs 2.5 lakh | 0% | 0% |
| Rs 2.5 to 4 lakh | 0% | 5% |
| Rs 4 to 5 lakh | 5% | 5% |
| Rs 5 to 8 lakh | 5% | 20% |
| Rs 8 to 10 lakh | 10% | 20% |
| Rs 10 to 12 lakh | 10% | 30% |
| Rs 12 to 16 lakh | 15% | 30% |
| Rs 16 to 20 lakh | 20% | 30% |
| Rs 20 to 24 lakh | 25% | 30% |
| Above Rs 24 lakh | 30% | 30% |
| Standard deduction | Rs 75,000 | Rs 50,000 |
| Section 87A rebate | Rs 60,000, taxable income up to Rs 12L | Rs 12,500, taxable income up to Rs 5L |
What each regime allows, and where the breakeven sits
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. Property buyers should also factor in stamp duty costs by state, which are not deductible under either regime.
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.
Why the sorting has been stable
Editor’s Analysis
With a year of hindsight, the honest answer is that people did not switch as a population. They switched at one end of the scale and stayed put at the other, and the dividing line was not the one the commentary expected. Below roughly Rs 25 lakh a year the New Regime arithmetic was obvious enough to move people on its own, because the deduction stack they would have had to fill under the Old Regime was larger than anything a salaried person can realistically assemble. Above that line, and particularly for anyone renting expensively in a metro while servicing a home loan, the HRA-plus-Section-24(b) combination held them exactly where they were.
What looks like inertia from the outside is mostly commitment. The Old Regime decision is rarely made in the filing month — it was made years earlier, when someone took a loan, signed a lease or bought a policy, and none of those are things you unwind because a comparison table came out in June. That is why the sorting has been so stable. It is also why the sorting is now a housing question rather than an income question: same salary, different housing situation, opposite answer. The regime that suits you changes when your housing does, not when the Budget does.
What the Section 87A rebate actually covers
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. The Rs 62,400 demand notice this produced is set out in full separately.
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).
Capital gains rate correction for FY 2024-25 and FY 2025-26. 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.
Why capital gains count towards the Rs 12 lakh threshold
The Rs 12 lakh threshold is a total income test — capital gains count towards it. This is the mechanic most often stated backwards, including by tax-filing content that is otherwise reliable. Section 87A grants the rebate where the assessee’s total income does not exceed the threshold, and total income under Section 2(45) includes income under every head, capital gains among them. So capital gains do two separate things: they count towards the Rs 12 lakh eligibility test, and they sit outside what the rebate can be applied against.
The two effects run in sequence, and missing the first one is expensive. A filer with Rs 9 lakh taxable salary and Rs 5 lakh STCG has total income of Rs 14 lakh. That is above Rs 12 lakh, so Section 87A does not apply at all — not even to the slab tax on the salary. Push the STCG down to Rs 2.5 lakh and total income becomes Rs 11.5 lakh; now the rebate is available, but only against the salary slab tax, with the STCG still taxed in full at 20 per cent. The rebate does not taper. It is present or absent, and one rupee of capital gain over the line removes it entirely.
The Rs 62,400 worked example
The Rs 62,400 worked example. A salaried reader earns Rs 9.25 lakh gross salary during FY 2025-26 and realises Rs 3 lakh in Short-Term Capital Gains from listed equity mutual funds. Gross salary Rs 9,25,000; STCG (listed equity) Rs 3,00,000. Here is the exact computation that the income tax portal will produce.
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.
“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.”
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 step-by-step mechanics of the return itself are set out in the ITR filing rules for salaried filers.
“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.”
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.
One thing to carry forward. FY 2025-26 is governed by the Income-tax Act, 1961, and every section number on this page is a 1961 Act reference. From FY 2026-27 the Income-tax Act, 2025 governs, and section numbers change even where the underlying rule does not — see our note on what the new Act changes for filing.
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 Rs 12 lakh Section 87A threshold is a total income test, and capital gains count towards it. Cross Rs 12 lakh on total income and the rebate disappears entirely — including on your salary slab tax. It does not taper.
- 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 9.25L 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 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 9.25 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?
Yes. The Rs 12 lakh eligibility threshold uses total income, and total income under Section 2(45) includes capital gains. Salary of Rs 9 lakh plus Rs 5 lakh STCG is total income of Rs 14 lakh — over the line, so Section 87A does not apply at all, not even to the slab tax on the salary. Note the two effects are separate and both bite: capital gains count towards the threshold, and the rebate cannot be applied against capital gains tax even when you are under the threshold. Our Rs 62,400 demand notice piece works both effects through in full.
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)
The 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.
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 9.25L salary + Rs 3L STCG profile is the canonical illustration. Declare all capital gains in Schedule CG before 31 July 2026.
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Subscribe freeWhich section replaced the one you know
61 provisions mapped from the Income-tax Act 1961 to the Act of 2025.
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Disclosure and method
The specific risk on this page: if your total income sits close to Rs 12 lakh and you have capital gains, the Section 87A rebate is the difference between owing nothing on your salary and owing the full slab tax on it. The rebate does not taper — one rupee of capital gain over the Rs 12 lakh total income line removes it completely. Have a Chartered Accountant confirm your own position before filing rather than relying on the worked example here, which is illustrative and uses round numbers. Note also that CBDT Circular No. 13/2025 addresses whether the rebate can be applied against special-rate income; it does not itself rule on the threshold test, which rests on the statutory definition of total income. All slab figures, rebate limits and capital gains rates here are FY 2025-26 (AY 2026-27) figures under the Income-tax Act, 1961, and change with each Finance Act. Nothing here is tax, legal or financial advice — see our full disclaimer. FinEstate earns revenue through display advertising; this article contains no sponsored content and no affiliate links. Researched and drafted with AI assistance and reviewed before publication.
Keep reading
This article is part of our income tax guide — the full set of explainers for salaried Indians, in the order you actually meet them.