Everyone Says ‘No Tax up to ₹12 Lakhs’ — But Do You Know Why? – The Complete Truth Behind Section 87A (FY 2025-26)
The claim of “no tax up to ₹12 lakhs” is true but comes with conditions tied to Section 87A of the Income-tax Act, 1961. Tax liability begins once income exceeds the basic exemption limit—₹2.5 lakh under the old regime and ₹4 lakh under the new regime—but Section 87A provides a rebate that can reduce tax liability to zero for eligible resident individuals. The rebate applies only if total income is within specified limits: up to ₹5 lakh under the old regime and ₹12 lakh under the new regime, with the rebate capped at ₹12,500 and ₹60,000 respectively. It excludes HUFs, firms, LLPs, and companies, and does not cover LTCG under Section 112A. Minor income exceedances can disqualify the rebate, and health and education cess applies separately. Understanding Section 87A, along with concepts like marginal relief, is essential for low and middle-income taxpayers to legally minimize tax liability, clarifying misconceptions about tax-free income thresholds.
No tax up to ₹12 lakhs — is it really true?
Yes, it is true… but there’s a catch.
Let me break it down for you.
Tax liability technically begins once your income exceeds the Basic Exemption Limit:
- ₹2,50,000 under the Old – Optional Tax Regime
- ₹4,00,000 under the New – Default Tax Regime (Section 115BAC)
So then, how is it possible that there’s no tax payable up to ₹12 lakhs?
This is where the real game begins.
The answer lies in one powerful but often misunderstood provision — Section 87A (Rebate).
Because of this section, eligible taxpayers can get a rebate of tax, effectively reducing their final tax liability to zero, even when income goes well beyond the basic exemption limit.
Let me break down Section 87A in detail and explain how this actually works.
Section 87A of the Income-tax Act, 1961 provides a rebate of income tax to resident individual taxpayers whose income falls within specified limits.
This provision is especially beneficial for low and middle-income earners, as it can reduce tax liability to zero in certain cases.
Who is Eligible for Rebate under Section 87A?
To claim rebate under Section 87A, All the following conditions must be satisfied:
1. The taxpayer must be a Resident Individual
2. The Total Income (after deductions, if any) should not exceed the prescribed limit
3. Rebate is not available to HUFs, firms, LLPs, or companies
Rebate u/s 87A
| Particulars | Old Regime | New Regime |
|---|---|---|
| Maximum Total Income (prescribed Limit) |
₹ 5,00,000 | ₹ 12,00,000 |
| Rebate: a. 100% of Tax Payableb. 12,500 / 60,000( Lower of a or b ) |
₹ 12,500 (Maximum) | ₹ 60,000 (Maximum) |
Key Points to Remember
√ Available only to Resident Individuals
√ Rebate applies to all types of income except LTCG u/s 112A
√ This Rebate shall be reduced before adding Health and Education Cess (HES)
√ While Opting for New Regime – an additional concept called Marginal relief should also be considered. (In the next part, I’ll break down the concept of Marginal Relief and explain how it actually works.
√ If income exceeds ₹5,00,000 / ₹12,00,000 even by ₹1, rebate will not available, subject to 288A/288B.
√ 288A/288B: Amount of Total Income and Tax rounded off to Nearest ₹10.
Let me help you understand Section 87A by walking you through a few examples.
1. Under Old – Optional Tax Regime
| Case – 1 | Case – 2 | |
|---|---|---|
| Total Income | ₹ 4,99,900 | ₹ 5,00,100 |
| Tax Liability | ₹ 12,495 | ₹ 12,520 |
| Less: Rebate 87A a. Tax Amount b. 12,500 (Whichever is lower) |
₹ 12,495 | Not Applicable |
| ₹ 0 | ₹ 12,520 | |
| Add: HEC @ 4% | Nil | ₹ 501 |
| Net Tax Liability | Nil | ₹ 13,021 |
2. Under New – Default Tax Regime (Sec 115BAC)
| Case – 1 | Case – 2 | |
|---|---|---|
| Total Income | ₹ 11,99,900 | ₹ 12,00,100 |
| Tax Liability | ₹ 59,990 | ₹ 60,015 |
| Less: Rebate 87A a. Tax Amount b. 60,000 (Whichever is lower) |
₹ 59,990 | Not Applicable |
| ₹ 0 | ₹ 60,015 | |
| Add: HEC @ 4% | Nil | ₹ 2,401 |
| Net Tax Liability | Nil | ₹ 62,416 |
Once you understand Section 87A, the ‘no tax up to ₹12 lakhs’ statement finally makes sense.
If this clarified Section 87A for you, share it with someone who still believes tax is zero by default. Still confused about Section 87A? Drop your question in the comments—I’ll explain.
The Section 87A rebate in the new regime is full rebate (up to Rs.60,000 of tax) if total income does not exceed Rs.12 lakh. But there are three nuances practitioners are seeing frequently.
First, special rate incomes are excluded. The rebate does NOT apply to STCG on listed equity and equity mutual funds (taxed at 20% under Section 111A, now renumbered in the Income Tax Act 2025), LTCG above Rs.1.25 lakh on equity (12.5% flat rate), and any income taxed at special rates like VDA gains. So a person with Rs.9 lakh salary and Rs.4 lakh LTCG has total income above Rs.12 lakh and gets only partial rebate on the salary portion.
Second, the old regime rebate is much lower at Rs.12,500 for income up to Rs.5 lakh. This asymmetry is one of the main reasons the new regime is more tax-efficient for most middle-income earners.
Third, marginal relief applies in the new regime. If total income is Rs.12.5 lakh (Rs.50,000 above the threshold), the additional tax on that Rs.50,000 should not exceed Rs.50,000. The ITR utility calculates this automatically but the underlying principle is useful for salary structuring.
In the new tax regime, people who earn just more than 12 lakhs take home salary is less than the people who earns less than 12 lakh salary. so sad to know
1260812 TOTAL TAXABLE INCOME HERE THEY CAN GIVE Rebate under section 87A, if applicable 8303 and total taxable income is 69123 .what is this rebate calculation
Whether short term profit consider in 12 lakhs
Suppose my salary 6lakh and
1 lakh interest income
4 lakh short term profit on shares
. Short term profit is taxable or
We have to pay tax on short term profit
such STCG amount will be included in the 12 lakhs limit.
Madam/Sir
There is also a marginal relief when income crosses RS 12 Lakh. I think that should also be explained with this section for overall understanding and clarity.
Already mentioned the same in ” Key Points to Remember ” Point No 4.