Under India's new tax regime, individuals earning up to ₹12.75 lakh may still owe taxes if they have income from capital gains, lotteries, or online gaming. While the Section 87A rebate covers salary income, it does not apply to earnings taxed at special rates. Taxpayers must carefully report these specific income sources to avoid receiving notices from the Income Tax Department.
Many taxpayers assume that the rebate under Section 87A of the Income-tax Act makes their total income tax-free if it stays below the ₹12.75 lakh threshold under the new tax regime. While this rebate provides significant relief for salary income, it is not a blanket exemption for all types of earnings. Investors and salaried employees who also earn money from stock market investments, gaming, or other non-salary sources need to understand that these specific portions of their income are treated differently by the tax authorities.
Impact of Special Rate Taxes
The tax laws differentiate between regular salary and income taxed at special rates. Special rate incomes include short-term capital gains, long-term capital gains, and winnings from sources like lotteries, horse races, and online gaming platforms. These categories are subject to their own specific tax slabs or flat rates, which are independent of the standard income tax brackets. Because the Section 87A rebate is designed to offset tax liability on income taxed at normal slab rates, it cannot be used to reduce the tax due on these special categories.
For example, if an individual earns a salary that falls within the rebate limit but also has winnings from an online gaming app, those winnings are taxed at a flat rate of 30% under Section 115BBJ. The tax department expects this to be paid regardless of how much salary was earned or whether the total income appears to be within the rebate range. Similarly, gains made from selling stocks or mutual funds—classified as either short-term or long-term capital gains—must be taxed according to their respective sections, such as 111A or 112A, without the benefit of the standard rebate.
Why Accurate Reporting Matters
Correctly filing your Income Tax Return is essential to prevent unnecessary scrutiny. Taxpayers are required to classify their capital gains as short-term or long-term and provide details on purchase and sale dates. When filing, it is important to reconcile these numbers with the Annual Information Statement, known as the AIS, and Form 26AS. These documents contain a summary of financial transactions that the tax department already tracks.
If a taxpayer assumes their income is tax-free and fails to report these special-rate earnings, or if they wrongly claim the Section 87A rebate against them, it can lead to tax demands or automated notices. These notices can require the individual to provide clarifications or pay the outstanding tax along with potential interest. Keeping clear records of all income sources and understanding that the rebate is limited to normal salary income is the most effective way to stay compliant with tax regulations.