Section 87A rebate

The Section 87A rebate is a direct reduction of the income tax computed, given by Section 87A of the Income-tax Act, 1961 to a resident individual whose total income does not exceed a threshold, extinguishing the tax up to that point. It is the provision that makes income up to Rs. 12 lakh tax-free in the new regime from the financial year 2025-26 onward. It is a rebate, not an exemption, and the difference is the key to understanding it.

A deduction lowers taxable income before the rates apply; a rebate is subtracted from the tax after the rates apply. So it is wrong to say the first Rs. 12 lakh is exempt. The tax is computed on the whole slab ladder from Rs. 4 lakh up, and then Section 87A wipes out the resulting tax, up to the rebate cap. The distinction matters as soon as the income crosses the threshold, or includes an income taxed at a special rate, because the rebate then behaves quite differently from an exemption.

This article covers the rebate in detail: the current figures in the new and old regimes, why the cap is set where it is, the marginal relief just above the Rs. 12 lakh limit with worked examples and the exact point where it stops, the incomes the rebate does not cover, who is eligible, its history, and where it sits in the tax computation. It does not re-argue the choice between the regimes, which the old versus new tax regime article covers.

The current figures

For the financial year 2026-27, unchanged from 2025-26, the rebate differs sharply between the two regimes.

In the new regime under Section 115BAC, the rebate is the lower of the tax payable or Rs. 60,000, and it is available when the total income does not exceed Rs. 12,00,000. The effect is nil tax up to a taxable income of Rs. 12,00,000. For a salaried employee or a pensioner, that is about Rs. 12,75,000 of gross pay, because the Rs. 75,000 standard deduction is taken off first to reach the taxable income.

In the old regime, the rebate is the lower of the tax payable or Rs. 12,500, available when the total income does not exceed Rs. 5,00,000, giving nil tax up to a taxable income of Rs. 5,00,000.

The new-regime cap is not an arbitrary round number. It equals the exact slab tax at a taxable income of Rs. 12 lakh: 5 per cent of the Rs. 4 lakh in the Rs. 4 lakh to Rs. 8 lakh slab is Rs. 20,000, and 10 per cent of the Rs. 4 lakh in the Rs. 8 lakh to Rs. 12 lakh slab is Rs. 40,000, which together are Rs. 60,000. The rebate was set precisely to zero out the tax at the Rs. 12 lakh point. The old-regime Rs. 12,500 is likewise 5 per cent of the Rs. 2.5 lakh in the Rs. 2.5 lakh to Rs. 5 lakh slab.

Budget 2026 made no change to the rebate, the thresholds, the slabs or the standard deduction, so the financial year 2026-27 figures are the Finance Act 2025 figures continued.

Marginal relief above Rs. 12 lakh

Without something to soften it, a taxpayer whose income crossed Rs. 12 lakh by a single rupee would jump from nil tax to the full slab tax, and would be worse off for earning a little more. Marginal relief, a proviso to Section 87A, prevents that in the new regime: the tax payable cannot exceed the amount of income above Rs. 12 lakh, before cess.

Take a taxable income of Rs. 12,10,000. The ordinary slab tax is Rs. 20,000 plus Rs. 40,000 plus 15 per cent of the Rs. 10,000 in the next slab, which is Rs. 61,500. But the income above Rs. 12 lakh is only Rs. 10,000, so marginal relief caps the tax at Rs. 10,000, a relief of Rs. 51,500. With the 4 per cent cess the liability is Rs. 10,400. A second case: at Rs. 12,25,000 the slab tax is Rs. 63,750, the excess over Rs. 12 lakh is Rs. 25,000, and the tax is capped at Rs. 25,000, or Rs. 26,000 with cess.

Marginal relief does not help forever. It stops at the point where the ordinary slab tax equals the excess over Rs. 12 lakh. Solving that, the slab tax of Rs. 60,000 plus 15 per cent of the excess equals the excess itself when the excess is Rs. 70,588, that is at a taxable income of Rs. 12,70,588. At and beyond that income the normal slab tax is lower than the marginal-relief cap, so the ordinary tax applies and both the rebate and the relief are fully gone. This precise figure, Rs. 12,70,588 of taxable income, is often rounded to about Rs. 12.7 lakh; it should not be confused with the Rs. 12.75 lakh of gross salary at which the rebate itself runs out, which is a different number reached after the standard deduction.

The old regime has no such marginal relief on its Rs. 5 lakh limit. A taxpayer at a taxable income of Rs. 5,00,001 in the old regime loses the entire Rs. 12,500 rebate at once and pays the ordinary slab tax, with no cushioning. So the smooth taper exists only in the new regime, around the Rs. 12 lakh limit.

What the rebate does not cover

The rebate applies to the tax on normally-slabbed income, not to tax charged at special rates. Two exclusions matter most.

Long-term capital gains on equity shares and equity mutual funds, taxed under Section 112A at 12.5 per cent above the annual exemption, are not covered by the rebate. Short-term capital gains on the same, taxed under Section 111A at 20 per cent, are also not covered. So a resident whose total income is Rs. 12 lakh but includes equity capital gains cannot use the rebate to zero out the tax on those gains.

A worked caveat makes the trap clear. Someone with Rs. 8 lakh of salary and Rs. 4 lakh of equity long-term capital gains has a total income of Rs. 12 lakh, but the Rs. 4 lakh of gains is taxed separately at 12.5 per cent, and the Section 87A rebate does not touch that tax. The rebate would still cover the tax on the Rs. 8 lakh of salary if the total income is within Rs. 12 lakh, but the special-rate tax on the gains stands. This is a common source of an unexpected tax bill for someone who assumed a Rs. 12 lakh income meant nil tax.

Who can claim it

The rebate is available only to a resident individual. A non-resident, a Hindu Undivided Family, a firm, an association of persons and a company cannot claim it. A resident of any age can, including senior and super-senior citizens, and the rebate is the lower of the actual tax computed or the cap, so it can bring the tax to nil but never below nil; there is no refund of an unused rebate. It is applied before the surcharge and before the Health and Education Cess.

A short history

Section 87A has been raised many times, and the two regimes have diverged.

The old-regime figure of Rs. 12,500 for a total income up to Rs. 5 lakh has been frozen since the financial year 2019-20. Every increase since has been in the new regime: Rs. 25,000 for a total income up to Rs. 7 lakh from 2023-24 under the Finance Act 2023, then Rs. 60,000 for a total income up to Rs. 12 lakh from 2025-26 under the Finance Act 2025. Marginal relief in the new regime was introduced alongside the Rs. 7 lakh limit and carried up to the Rs. 12 lakh limit.

Where the rebate sits in the computation

The order of the computation shows why the rebate is so powerful. First, the gross total income is worked out; then the standard deduction and any eligible deductions are subtracted to reach the total income; then the slab rates are applied to get the tax; then the Section 87A rebate is subtracted, with marginal relief applied if the income is in the new-regime band just above Rs. 12 lakh; then any surcharge is added; and finally the 4 per cent Health and Education Cess is added on the post-rebate tax.

Because the rebate is applied before the cess, when the rebate zeroes the tax there is no cess either, so the liability is genuinely nil, not merely small. This is why so many central government employees and pensioners now pay no tax at all. A salary or pension up to about Rs. 12.75 lakh, after the Rs. 75,000 standard deduction and the employer National Pension System contribution allowed under Section 80CCD(2), lands at or below Rs. 12 lakh of taxable income, and the rebate extinguishes the tax. The TDS on salary then falls to nil, because the Drawing and Disbursing Officer stops deducting once the projected liability after the rebate is zero, which is covered in the take-home salary article.

See also

• Income tax for pensioners
• Old versus new tax regime
• Standard deduction
• TDS on salary (Section 192)
• Income tax for government employees
• Section 89 relief
• Professional tax
• Advance tax
• Form 16
• Form 26AS
• Take-home salary for central government employees
• Dearness allowance
• House rent allowance
• City classification for HRA
• National Pension System
• Unified Pension Scheme
• Family pension
• Central government pension
• Commutation of pension
• Gratuity for central government employees
• Leave encashment
• Basic pay
• 7th Central Pay Commission
• Pay matrix
• Central Board of Direct Taxes
• Central government employees in India
• Income tax inspector salary
• Income tax calculator
• HRA exemption calculator
• 7th CPC salary calculator

External references

• Income Tax Department
• Income-tax Act, Section 87A
• Central Board of Direct Taxes

References

1. Income-tax Act, 1961, Section 87A (rebate for a resident individual), with the proviso providing marginal relief in the new regime.
2. Income-tax Act, 1961, Section 115BAC(1A) (the new regime), with the rebate of Rs. 60,000 for a total income up to Rs. 12,00,000 as set by the Finance Act 2025 and continued for the financial year 2026-27.
3. Income-tax Act, 1961, Sections 111A and 112A (short-term and long-term capital gains at special rates, excluded from the rebate), and Section 16(ia) (standard deduction of Rs. 75,000 in the new regime, Rs. 50,000 in the old).
4. The progression of Section 87A: Finance Act 2013 (Rs. 2,000), Finance Act 2016 (Rs. 5,000), Finance Act 2017 (Rs. 2,500), Finance Act 2019 (Rs. 12,500), Finance Act 2023 (new-regime Rs. 25,000 up to Rs. 7 lakh), Finance Act 2025 (new-regime Rs. 60,000 up to Rs. 12 lakh).