Income Up to ₹7 Lakh Now Tax-Free—Even on Mutual Fund and Stock Gains? Here's the Full Picture

Is your total annual income ₹7 lakh or less, including profits from mutual funds and stock investments? If yes, you may currently be eligible for complete tax exemption under Section 87A. But here's the catch—this relief is available only till this assessment year. Recent changes introduced through the Finance Act 2025 are set to alter how capital gains are treated for tax exemptions starting next year. So is this a true financial relief or just a temporary breather? Let’s decode the latest income tax rules for FY 2024–25 and understand when capital gains remain tax-free and when they won’t.

Section 87A: What It Means for You in FY 2024–25

For individuals who opt for the new tax regime, the government offers a rebate under Section 87A. This allows taxpayers to claim up to ₹25,000 in tax rebate if their total taxable income is ₹7 lakh or below. In simple terms, this means zero income tax liability in such cases.

However, the burning question among investors is—does this exemption apply even when your income includes Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG) from equities or mutual funds?

Capital Gains and Section 87A: What’s Changing?

As of Assessment Year 2025–26 (for income earned in FY 2024–25), Section 87A still applies, even if your income includes STCG or LTCG. But under the new rules introduced in the Finance Act 2025, this will no longer be the case from the next assessment year onward.

Key Clarification from Finance Act 2025:

If your income includes capital gains that are taxed at special rates—

• STCG under Section 111A (typically from equity mutual funds or listed shares held for less than 12 months), or

• LTCG under Section 112A (from equities held for over a year)—
  then you will not be eligible for rebate under Section 87A from AY 2026–27 onward.

Real-Life Example to Understand the Change

Let’s say your income for FY 2024–25 (AY 2025–26) looks like this:

• Salary: ₹3,00,000

• STCG from equity mutual funds: ₹2,00,000

• LTCG from stocks: ₹2,00,000

• Total taxable income: ₹7,00,000

Since you’re opting for the new tax regime, you can still claim the ₹25,000 rebate under Section 87A, resulting in zero tax liability.

However, if the same income structure continues into FY 2025–26 (AY 2026–27), Section 87A rebate will no longer apply—you’ll have to pay tax on your capital gains, since they are taxed under special provisions.

When Will You Still Get Tax Relief?

If your entire income, including capital gains, is below the basic exemption limit (currently ₹3,00,000 under the new regime), then no tax will be applicable, even if the income comes from LTCG or STCG.

For instance:

• Salary: ₹1,00,000

• Capital Gains (LTCG + STCG): ₹2,00,000

• Total Income: ₹3,00,000

In this case, you don’t owe any tax, because your income is within the exempted slab—regardless of the income type.

Key Takeaways:

• For AY 2025–26, you can still claim full rebate under Section 87A for total income up to ₹7 lakh, including capital gains.

• From AY 2026–27 onward, capital gains taxed under special rates will not qualify for the 87A rebate.

• Taxpayers with lower salary income can still manage capital gains within the basic exemption limits and avoid tax.

• Choice of tax regime and understanding capital gain classification will be crucial in future tax planning.

Conclusion:

If your income includes mutual fund or stock market profits and stays under ₹7 lakh for FY 2024–25, this may be your last chance to enjoy full tax exemption on the entire amount—including STCG and LTCG—under Section 87A. Starting next year, this benefit will be restricted, especially for those earning through capital markets. Investors and salaried individuals should carefully evaluate their tax regime selection and monitor income categories while filing their ITR to avoid future surprises.