Key Takeaways
- Section 87A provides a tax rebate (not deduction) that directly reduces your tax liability to zero if your income is within the threshold.
- Under the new tax regime for FY 2025-26 (AY 2026-27), the rebate is Rs 60,000 for taxable income up to Rs 12,00,000 (excluding special rate income like capital gains).
- Under the old tax regime, the rebate remains Rs 12,500 for taxable income up to Rs 5,00,000.
- Salaried employees under the new regime get an additional Rs 75,000 standard deduction, making salary income up to Rs 12,75,000 effectively tax-free.
- If your income slightly exceeds Rs 12 lakh (new regime), marginal relief ensures your total tax does not exceed the amount by which your income crosses the threshold.
- The rebate does not apply to income taxed at special rates: STCG under Section 111A and LTCG under Section 112A.
The Section 87A rebate is the single reason why income up to Rs 12 lakh is tax-free under the new regime for FY 2025-26. It is not a deduction that lowers taxable income. It is a rebate that wipes out your computed tax after the slab calculation. This distinction matters because the rebate has a hard ceiling: cross the income threshold by even one rupee and the rebate disappears, unless marginal relief steps in to soften the cliff.
This guide covers how Section 87A works, the exact eligibility rules for both regimes, the marginal relief mechanism, the capital gains exclusion that trips up investors, and how the rebate flows into your ITR.
Looking for expert help with Section 87A income tax rebate eligibility, Rs 60,000 limit, and marginal relief for AY 2026-27? The team at Tax Garden helps Indian SMEs stay compliant end-to-end: filings, notices, and advisory, all in one place.
What Is Section 87A?
Section 87A of the Income Tax Act, 1961 allows a resident individual to claim a rebate against tax payable. The rebate reduces the tax liability directly, unlike a deduction under Chapter VI-A (like 80C or 80D) which reduces taxable income.
The sequence is:
- Compute total income after all deductions.
- Calculate tax on that income using the applicable slab rates.
- Apply Section 87A rebate to reduce the computed tax.
- Add 4% health and education cess on the remaining tax (after rebate).
- The final amount is your tax payable.
If the computed tax is less than or equal to the maximum rebate, the entire tax is wiped out and you pay zero (plus zero cess, since 4% of zero is zero).
Rebate vs Deduction: Why It Matters
A Section 80C deduction of Rs 1,50,000 reduces your taxable income. If you are in the 30% bracket, it saves Rs 45,000 of tax. A Section 87A rebate of Rs 60,000 removes Rs 60,000 of tax directly. But the rebate is all-or-nothing: if your income exceeds the threshold, you lose the entire rebate (subject to marginal relief).
Section 87A Rebate Limits: New Regime vs Old Regime
| Parameter | New Tax Regime (Section 115BAC) | Old Tax Regime |
|---|---|---|
| Maximum rebate amount | Rs 60,000 | Rs 12,500 |
| Income threshold | Taxable income up to Rs 12,00,000 | Taxable income up to Rs 5,00,000 |
| Applicable to | Resident individuals only | Resident individuals only |
| Standard deduction (salaried) | Rs 75,000 | Rs 50,000 |
| Effective zero-tax salary | Rs 12,75,000 | Depends on total deductions |
| Special rate income (STCG/LTCG) | Excluded from threshold check; rebate not applicable on such income | Included in threshold check; rebate not applicable on such income |
Under the new regime, the Rs 60,000 rebate exactly equals the tax on Rs 12 lakh of income. Here is the maths:
| Slab | Income in slab | Rate | Tax |
|---|---|---|---|
| 0 to Rs 4,00,000 | Rs 4,00,000 | Nil | Rs 0 |
| Rs 4,00,001 to Rs 8,00,000 | Rs 4,00,000 | 5% | Rs 20,000 |
| Rs 8,00,001 to Rs 12,00,000 | Rs 4,00,000 | 10% | Rs 40,000 |
| Total | Rs 12,00,000 | Rs 60,000 |
The rebate of Rs 60,000 wipes out the full Rs 60,000 tax. Net payable: zero. Cess: zero.
Who Can Claim the Rebate?
Eligible:
- Resident individuals (including senior citizens and super senior citizens)
- Both salaried and non-salaried individuals
- Individuals with business or professional income, provided total income is within the threshold
Not eligible:
- Non-resident Indians (NRIs) and Residents Not Ordinarily Resident (RNOR)
- Hindu Undivided Families (HUFs)
- Partnership firms, LLPs, and companies
- Individuals whose taxable income exceeds the threshold (Rs 12 lakh under new regime, Rs 5 lakh under old regime)
The Rs 12,75,000 Zero-Tax Salary Under the New Regime
For salaried employees, the standard deduction of Rs 75,000 under the new regime reduces gross salary before arriving at taxable income. This means:
Gross salary of Rs 12,75,000 Minus standard deduction: Rs 75,000 = Taxable income: Rs 12,00,000 Tax on Rs 12,00,000: Rs 60,000 Section 87A rebate: Rs 60,000 Net tax: Rs 0
If you are salaried and your gross salary (before any other income) is Rs 12,75,000 or less, and you have no other income sources, your income tax liability is zero under the new regime.
Marginal Relief: What Happens If Income Slightly Exceeds Rs 12 Lakh?
The rebate threshold creates a cliff. At Rs 12,00,000 you pay zero tax. At Rs 12,00,001 you lose the entire Rs 60,000 rebate. Without any safeguard, someone earning Rs 12,10,000 would pay Rs 61,500 in tax (on the full Rs 12.1 lakh), which is absurd because the extra Rs 10,000 of income triggers Rs 61,500 of tax.
Marginal relief fixes this. The rule: your total tax cannot exceed the amount by which your income exceeds Rs 12,00,000.
Worked Example: Income of Rs 12,10,000
Step 1: Compute tax at slab rates (new regime)
| Slab | Tax |
|---|---|
| 0 to 4L | Rs 0 |
| 4L to 8L | Rs 20,000 |
| 8L to 12L | Rs 40,000 |
| 12L to 12.1L (15%) | Rs 1,500 |
| Total | Rs 61,500 |
Step 2: Compute excess income above threshold Rs 12,10,000 minus Rs 12,00,000 = Rs 10,000
Step 3: Apply marginal relief Tax of Rs 61,500 exceeds excess income of Rs 10,000. Marginal relief applies. Tax is limited to Rs 10,000.
Step 4: Add cess 4% of Rs 10,000 = Rs 400. Total tax payable = Rs 10,400.
Without marginal relief, you would pay Rs 61,500 + Rs 2,460 cess = Rs 63,960. With marginal relief, you pay Rs 10,400. That is a saving of Rs 53,560.
Worked Example: Income of Rs 13,00,000
Step 1: Compute tax at slab rates
| Slab | Tax |
|---|---|
| 0 to 4L | Rs 0 |
| 4L to 8L | Rs 20,000 |
| 8L to 12L | Rs 40,000 |
| 12L to 13L (15%) | Rs 15,000 |
| Total | Rs 75,000 |
Step 2: Compute excess income Rs 13,00,000 minus Rs 12,00,000 = Rs 1,00,000
Step 3: Check marginal relief Tax of Rs 75,000 is less than excess income of Rs 1,00,000. No marginal relief needed. Regular tax applies.
Step 4: Add cess 4% of Rs 75,000 = Rs 3,000. Total tax payable = Rs 78,000.
The crossover point (where regular tax equals excess income and marginal relief stops helping) is roughly around Rs 12,75,000 to Rs 13,00,000 depending on the exact calculation.
Capital Gains and the Section 87A Trap
This is where most ITR mistakes happen. The rebate rules treat capital gains differently under the two regimes.
New Regime: Capital Gains Are Excluded
Under the new regime for FY 2025-26, the Finance Act 2025 clarifies:
- For eligibility: Total income for the Rs 12 lakh threshold check excludes special rate income (STCG under Section 111A taxed at 20%, and LTCG under Section 112A taxed at 12.5%).
- For rebate application: Even if you are eligible, the rebate cannot reduce the tax on special rate income. It only reduces the tax on normal income.
Example: You have Rs 10,00,000 of salary income and Rs 3,00,000 of LTCG from equity mutual funds.
- Total income for threshold check: Rs 10,00,000 (LTCG excluded). This is below Rs 12 lakh, so you are eligible.
- Tax on salary income (Rs 10L): Rs 20,000 (4-8L) + Rs 20,000 (8-10L) = Rs 40,000. Rebate wipes this to zero.
- Tax on LTCG: Rs 3,00,000 minus Rs 1,25,000 exemption = Rs 1,75,000 taxable at 12.5% = Rs 21,875. This is payable. The rebate does not touch it.
- Cess: 4% of Rs 21,875 = Rs 875.
- Total tax: Rs 22,750.
Old Regime: Capital Gains Are Included in the Threshold
Under the old regime, total income for the Rs 5 lakh threshold includes special rate income. If your salary is Rs 4,50,000 and you have Rs 60,000 of STCG, your total income is Rs 5,10,000. This exceeds Rs 5 lakh, so the rebate is not available at all.
Even if your total income is within Rs 5 lakh (including capital gains), the rebate amount can only reduce tax on normal income, not on capital gains.
Common Mistake
Many taxpayers assume LTCG of Rs 1 lakh (within the Rs 1.25 lakh exemption) has no effect on Section 87A. Under the new regime, this is correct because LTCG is excluded from the threshold. Under the old regime, exempt LTCG does not count as income. But LTCG above the exemption limit does count and can push you over the Rs 5 lakh threshold.
How to Claim Section 87A Rebate in Your ITR
The rebate is not something you claim separately. The income tax e-filing portal at incometax.gov.in applies it automatically based on the income you report in your ITR.
Here is what happens during filing:
- You fill in all income details (salary, house property, business, capital gains, other sources).
- The portal computes total income after deductions.
- If total income is within the threshold, the portal applies the rebate in the tax computation sheet.
- The rebate appears in the ITR form under "Rebate under Section 87A" in the tax computation section.
- You verify the amount and submit.
There is no separate form to fill. However, you should verify that the portal has applied the rebate correctly. Common errors:
- Wrong regime selection: If you accidentally file under the old regime and your income is between Rs 5 lakh and Rs 12 lakh, you lose the rebate. Under the new regime, you would have got it.
- Capital gains not segregated: If capital gains are entered incorrectly, the threshold check may fail.
- Income from other sources missing: Interest income, rental income, or other sources that push total income above the threshold will disqualify the rebate.
Section 87A Under the New Income Tax Act, 2025
The Income Tax Bill 2025, which takes effect from FY 2026-27 (AY 2027-28), renumbers Section 87A as Section 156. The substantive provisions remain the same for now, but the section reference changes. For AY 2026-27, the current Section 87A under the Income Tax Act, 1961 applies.
Quick Reference: Section 87A Eligibility Checklist
Before you file, run through this:
- Are you a resident individual? NRIs and RNOR individuals cannot claim the rebate.
- Which regime are you filing under? New regime: Rs 12 lakh threshold, Rs 60,000 rebate. Old regime: Rs 5 lakh threshold, Rs 12,500 rebate.
- What is your total income after deductions? Under the new regime, exclude STCG (Section 111A) and LTCG (Section 112A) from this figure.
- Is it within the threshold? If yes, the rebate applies to tax on normal income only.
- Do you have capital gains? Remember, the rebate will not reduce tax on capital gains even if you are eligible.
- Have you checked the ITR computation? Verify the portal applied the rebate in the tax calculation section before submitting.
Section 87A Rebate: Old Regime Worked Example
Profile: Resident individual, gross income Rs 7,50,000, deductions: Rs 1,50,000 (Section 80C) + Rs 25,000 (Section 80D) + Rs 50,000 (standard deduction).
Gross income: Rs 7,50,000 Standard deduction: Rs 50,000 Net salary: Rs 7,00,000 Less 80C: Rs 1,50,000 Less 80D: Rs 25,000 Taxable income: Rs 5,25,000
Since taxable income exceeds Rs 5,00,000, the rebate is not available under the old regime.
Tax:
- 0 to 2.5L: Nil
- 2.5L to 5L: 5% = Rs 12,500
- 5L to 5.25L: 20% = Rs 5,000
- Total tax: Rs 17,500
- Cess: Rs 700
- Tax payable: Rs 18,200
If the same person had Rs 25,000 more in deductions (total deductions Rs 2,50,000), taxable income drops to Rs 5,00,000. Rebate of Rs 12,500 kicks in, tax becomes zero. This shows how sensitive the old regime rebate is to Rs 5 lakh boundary.
Frequently Asked Questions
Can I claim Section 87A rebate if I have only capital gains income and no salary? Under the new regime, if your non-special-rate income (like interest, rental income, or business income) is below Rs 12 lakh, you are eligible for the rebate on tax computed on that income. But the rebate will not reduce tax on your capital gains (STCG u/s 111A or LTCG u/s 112A). Under the old regime, total income including capital gains must be below Rs 5 lakh.
Is the rebate available for senior citizens? Yes. Section 87A applies to all resident individuals regardless of age. Senior citizens (60 years and above) and super senior citizens (80 years and above) are eligible if they meet the income threshold.
Does the employer consider Section 87A while deducting TDS from salary? Yes. When computing TDS on salary under Section 192, the employer considers the rebate under Section 87A. If the employee's estimated total income is within the threshold, the employer will not deduct TDS. This is why many salaried employees with income up to Rs 12.75 lakh see zero TDS on their salary slips under the new regime.
What if I forget to claim the rebate? The rebate is applied automatically during ITR processing. Even if you miss it while filing, the Centralized Processing Centre (CPC) will apply it during assessment if your income qualifies. However, it is better to verify at the time of filing.
Is the rebate available for income from business or profession? Yes, provided you are a resident individual and your total income is within the threshold. The rebate is not restricted to salaried individuals.
The information in this guide is based on the Income Tax Act, 1961, Finance Act 2025, and the income tax slab rates notified for FY 2025-26 (AY 2026-27). Section references, rebate limits, and slab rates were verified against the Income Tax Department portal (incometax.gov.in), ClearTax, Tax2win, Bajaj Finserv, and TaxGuru as of May 2026. Tax laws can change through Finance Acts or CBDT notifications. Consult a qualified tax professional for advice specific to your situation.
