Rebate Under Section 87A: Tax Benefits & Updates for FY 2025-26

Summary: Section 87A of the Income-tax Act provides tax rebates for individual residents in India with total income not exceeding ₹5 lakh, effectively making them tax-exempt. The Finance Act, 2023 introduced a proviso extending benefits to taxpayers under Section 115BAC, granting a rebate of up to ₹25,000 for income up to ₹7 lakh and marginal relief for slightly higher incomes. From AY 2026-27, amendments propose raising the rebate threshold to ₹12 lakh and increasing the maximum rebate to ₹60,000 for those under Section 115BAC. The rebate remains unavailable for incomes taxed at special rates, such as capital gains under Sections 111A and 112. These changes align with the revised tax slabs under Section 115BAC, which specify progressive rates from nil tax on income up to ₹4 lakh to 30% for income above ₹24 lakh. The amendments, effective from April 1, 2026, aim to provide greater tax relief under the new tax regime.

Rebate under section 87A

Under the provisions of section 87A of the Act, an assessee, being an individual resident in India, having total income not exceeding Rs 5 lakh, is provided a rebate of 100 per cent of the amount of income-tax payable i.e., an individual having income till Rs 5 lakh is not required to pay any income-tax.

2. Finance Act, 2023 inserted proviso to the said section, to provide rebate of income-tax in cases where the total income of such assessee is chargeable to tax under sub-section (1A) of section 115BAC. Proviso to section 87A provides the rebate of income-tax in cases of such individuals, upto Rs.25,000/-where the total income does not exceed Rs. 7,00,000/- (clause (a) of the said proviso) and marginal relief where the total income exceeds Rs. 7,00,000/- (clause (b) of the said proviso) to income chargeable to tax under sub-section (1A) of section 115BAC.

3. The provisions of sub-section (1A) of section 115BAC are subject to the other provisions of Chapter XII i.e. determination of tax in certain special cases. Hence, proviso to section 87A clearly provides that tax on incomes chargeable at special rates (for e.g.: capital gains u/s 111A, 112 etc.) as specified under various provisions of Chapter XII, are not included while determining the rebate of income-tax under the first proviso to section 87A.

4. From assessment year 2026-27 onwards, for an assessee, being an individual resident in India whose income is chargeable to tax under the sub-section (1A) of section 115BAC, it is proposed to,–

(i) enhance the limit of total income for rebate in clause (a) and (b) of first proviso under section 87A, on which the income-tax is payable as per the rates of income-tax under sub-section (1A) of section 115BAC, from Rs. 7,00,000/- to Rs. 12,00,000/- and the limit of rebate in clause (a) of first proviso to section 87A from Rs. 25,000/- to Rs. 60,000/-.

(ii) rationalise the first proviso to section 87A by inserting a new proviso so as to provide that the deduction under the first proviso, shall not exceed the amount of income-tax payable as per the rates provided in sub-section (1A) of section 115BAC.

5. Further, as mentioned in para. 4 above, such rebate of income-tax is not available on tax on incomes chargeable at special rates (for e.g.: capital gains u/s 111A, 112 etc.).

[Clauses 2, 20, 24 & the First Schedule]

Extract of Relevant Clauses of Finance Bill, 2025

Clause 2 read with the First Schedule to the Bill, seeks to specify the rates at which income-tax is to be levied on income chargeable to tax for the assessment year 2025-2026. Further, it lays down the rates at which tax is to be deducted at source during the financial year under the Income-tax Act; and the rates at which “advance tax” is to be paid, tax is to be deducted at source from, or paid on, income chargeable under the head “Salaries” or deducted under section 194P of the Income-tax Act and tax is to be calculated and charged in special cases for the financial year 2025-2026.

Clause 20 of the Bill seeks to amend section 87A of the Income-tax Act relating to rebate of income-tax in case of certain individuals.

The said section provides that an assessee, being an individual resident in India, whose total income does not exceed five hundred thousand rupees, shall be entitled to a deduction, from the amount of income-tax (as computed before allowing the deductions under this Chapter) on his total income with which he is chargeable for any assessment year, of an amount equal to hundred per cent of such income-tax or an amount of twelve thousand and five hundred rupees, whichever is less.

Proviso to the said section provides that where the total income of the assessee is chargeable to tax under sub-section (1A) of section 115BAC, and the total income—

(a) does not exceed seven hundred thousand rupees, the assessee shall be entitled to a deduction from the amount of income-tax (as computed before allowing for the deductions under this Chapter) on his total income with which he is chargeable for any assessment year, of an amount equal to one hundred per cent. of such income-tax or an amount of twenty-five thousand rupees, whichever is less;

(b) exceeds seven hundred thousand rupees and the income-tax payable on such total income exceeds the amount by which the total income is in excess of seven hundred thousand rupees, the assessee shall be entitled to a deduction from the amount of income-tax (as computed before allowing the deductions under this Chapter) on his total income, of an amount equal to the amount by which the income-tax payable on such total income is in excess of the amount by which the total income exceeds seven hundred thousand rupees.

It is proposed to amend the proviso to the said section to substitute the seven hundred thousand rupees with twelve hundred thousand rupees and twenty-five thousand rupees with sixty thousand rupees respectively.

It is further proposed to insert a second proviso to the said section to provide that the deduction under the first proviso, shall not exceed the amount of income-tax payable as per the rates provided in sub-section (1A) of section 115BAC.

These amendments will take effect from 1st April, 2026 and will, accordingly, apply in relation to the assessment year 2026-2027 and subsequent assessment years.

Clause 24 of the Bill seeks to amend section 115BAC of the Income-tax Act relating to tax on income of individuals, Hindu undivided family and others.

It is proposed to amend sub-section (1A) of the said section to provide that notwithstanding anything contained in this Act but subject to the provisions of this Chapter, the income-tax payable in respect of the total income of a person, being an individual or Hindu undivided family or association of persons (other than a co-operative society), or body of individuals, whether incorporated or not, or an artificial juridical person referred to in sub-clause (vii) of clause (31) of section 2, other than a person who has exercised an option under sub-section (6), for any previous year relevant to the assessment year beginning on or after the 1st April, 2026, shall be computed at the rate of tax given in the following Table, namely:—

Table

These amendments will take effect from the 1st April, 2026 and will, accordingly, apply in relation to the assessment year 2026-2027 and subsequent assessment years.

Extract of Relevant Amendment Proposed by Finance Bill, 2025

20. Amendment of section 87A.

In section 87A of the Income-tax Act, with effect from the 1st April, 2026,––

(a) in first proviso,––

(i) in clause (a),––

(I) for the words “seven hundred thousand rupees”, the words “twelve hundred thousand rupees” shall be substituted;

(II) for the words “twenty-five thousand rupees”, the words “sixty thousand rupees” shall be substituted;

(ii) in clause (b), for the words “seven hundred thousand rupees” at both the places where they occur, the words “twelve hundred thousand rupees” shall be substituted;

(b) after the proviso, the following proviso shall be inserted, namely:––

“Provided further that the deduction under the first proviso, shall not exceed the amount of income-tax payable as per the rates provided in sub-section (1A) of section 115BAC.”.

24. Amendment of section 115BAC.

In section 115BAC of the Income-tax Act, in sub­section (1A), with effect from the 1st April, 2026,––

(a) in clause (ii), the words “or after” shall be omitted;

(b) after clause (ii), the following clause shall be inserted, namely:––

“(iii) for any previous year relevant to the assessment year beginning on or after the 1st April, 2026, shall be computed at the rate of tax given in the following Table, namely:—

TABLE