Summary: Section 87A of the Income Tax Act, 1961 provides a rebate from tax payable to resident individuals and is distinct from a deduction from taxable income. For FY 2025-26 (AY 2026-27), the new tax regime permits a rebate of up to ₹60,000 where taxable income is up to ₹12 lakh, while the old regime continues to provide a maximum rebate of ₹12,500 for taxable income up to ₹5 lakh. Salaried individuals can effectively have gross salary income up to ₹12.75 lakh without tax liability under the new regime after considering the ₹75,000 standard deduction. The rebate is applied after computation of tax but before health and education cess. Marginal relief addresses the cliff effect where income marginally exceeds ₹12 lakh by ensuring that additional tax does not exceed the income above the threshold. The rebate is subject to important exclusions, including specified special-rate income such as equity capital gains and flat-rate income from lotteries, betting and online gaming. It is also unavailable to non-residents, HUFs, AOPs, BOIs and companies. Practical examples demonstrate its operation for salaried taxpayers, taxpayers earning equity capital gains, senior citizens under the old regime and non-residents. The rebate is ordinarily auto-computed through the income-tax return utility or employer payroll/TDS calculation, though taxpayers with special-rate income should carefully review the computation.
- Section 87A Rebate Under the New Tax Regime (2026): Eligibility, Limitations and Practical Examples
- What is Section 87A?
- Current Limits: New Regime vs Old Regime (FY 2025-26 / AY 2026-27)
- How the Rebate Actually Works
- Marginal Relief: What Happens Just Above the Threshold
- Key Limitations and Exclusions
- Practical Examples
- Example 1: Salaried employee, gross salary ₹12.5 lakh (New Regime)
- Example 2: Salaried employee, gross salary ₹13 lakh (New Regime)
- Example 3: Individual with salary ₹9 lakh plus ₹2 lakh short-term capital gains from equity (New Regime)
- Example 4: Senior citizen (65 years), taxable income ₹5.5 lakh (Old Regime)
- Example 5: Non-resident Indian, taxable income ₹8 lakh (New Regime)
- Old Regime vs New Regime: Which Rebate Threshold Matters More?
- Claiming the Rebate
- Key Takeaways
Section 87A Rebate Under the New Tax Regime (2026): Eligibility, Limitations and Practical Examples
Every tax season, one provision does more to determine whether the “common taxpayer” pays anything at all than perhaps any other single section of the Income Tax Act: Section 87A. For FY 2025-26 (AY 2026-27) — referred to as “Tax Year 2026-27” once the new Income Tax Act, 2025 framework kicks in from April 1, 2026 — the rebate under this section remains the single biggest reason why a large chunk of salaried and middle-income India pays zero tax under the new regime.
This article walks through what the rebate is, who can claim it, where it stops applying, and how it plays out with real numbers.
What is Section 87A?
Section 87A of the Income Tax Act, 1961 gives a direct rebate on the tax payable, not a deduction from taxable income. That distinction matters: a deduction lowers the income on which tax is calculated, while a rebate wipes out (fully or partially) the tax that has already been computed on that income. It is available only to resident individuals — non-resident Indians (NRIs), Hindu Undivided Families (HUFs), Associations of Persons (AOPs), Bodies of Individuals (BOIs), and companies are all excluded, regardless of how low their income is.
Current Limits: New Regime vs Old Regime (FY 2025-26 / AY 2026-27)
| Regime | Taxable Income Limit | Maximum Rebate |
|---|---|---|
| New Tax Regime | Up to ₹12,00,000 | Up to ₹60,000 |
| Old Tax Regime | Up to ₹5,00,000 | Up to ₹12,500 |
The new-regime limit was raised sharply in the Union Budget 2025 — from a taxable income ceiling of ₹7 lakh (rebate capped at ₹25,000) in FY 2024-25, up to ₹12 lakh (rebate capped at ₹60,000) in FY 2025-26. The Union Budget 2026 left these figures unchanged, so the same limits carry into FY 2026-27 as well.
For salaried individuals, the picture looks even better once the standard deduction is factored in. With a standard deduction of ₹75,000 available under the new regime, gross salary income of up to ₹12.75 lakh can result in zero tax liability, since the deduction brings net taxable income down to the ₹12 lakh threshold.
How the Rebate Actually Works
The rebate is applied after tax is calculated using the applicable slab rates, but before health and education cess is added. It equals the lower of:
1. The actual tax computed on total income under the chosen regime, or
2. The prescribed cap (₹60,000 under the new regime, ₹12,500 under the old regime)
So if your computed tax works out to less than ₹60,000 (or ₹12,500 under the old regime), the rebate simply zeroes out that entire amount — you don’t get a “refund” for the unused balance.
Marginal Relief: What Happens Just Above the Threshold
One quirk of a cliff-edge threshold is that someone earning ₹12,00,001 could, in theory, end up paying much more tax than someone earning ₹12,00,000 who pays nothing. To smooth this out, marginal relief ensures that the additional tax payable never exceeds the amount of income earned above ₹12 lakh. This means taxpayers just over the limit pay only a small, proportionate amount of tax rather than losing the rebate outright and facing a steep jump in liability.
Key Limitations and Exclusions
The rebate is generous, but it does not apply everywhere. Some important carve-outs for FY 2025-26 (AY 2026-27) onward:
- Special-rate incomes are excluded. Long-term capital gains (LTCG) from listed equity shares and equity mutual funds do not qualify for the Section 87A rebate, even though gains up to ₹1.25 lakh on such assets remain separately tax-free under other provisions.
- Short-term capital gains (STCG) from equity are also excluded from rebate eligibility starting FY 2025-26 — a notable tightening compared to earlier interpretations that were contested in courts and utility software.
- Flat-rate incomes such as winnings from lotteries, betting, or online gaming are taxed at fixed rates plus applicable surcharge and cess, and do not qualify for the rebate.
- Non-residents, HUFs, AOPs, BOIs, and companies cannot claim the rebate under any circumstances, irrespective of income level.
- The rebate applies only if total income (excluding the excluded special-rate items above) does not exceed the prescribed limit for the chosen regime.
Practical Examples
Example 1: Salaried employee, gross salary ₹12.5 lakh (New Regime)
After the ₹75,000 standard deduction, taxable income = ₹11.75 lakh. Since this is below ₹12 lakh, tax computed on slab rates is fully offset by the Section 87A rebate. Net tax payable: ₹0.
Example 2: Salaried employee, gross salary ₹13 lakh (New Regime)
After standard deduction, taxable income = ₹12.25 lakh — above the ₹12 lakh threshold. The rebate no longer applies in full, but marginal relief kicks in, capping the tax payable so it does not exceed the ₹25,000 by which income exceeds ₹12 lakh. The result is a modest, not full-slab, tax liability.
Example 3: Individual with salary ₹9 lakh plus ₹2 lakh short-term capital gains from equity (New Regime)
Total income is ₹11 lakh, seemingly within the ₹12 lakh limit. However, since STCG from equity is excluded from rebate eligibility, tax on the ₹2 lakh STCG portion (at the applicable special rate) must still be paid, even though the rebate may apply to the tax computed on the remaining ₹9 lakh of regular income.
Example 4: Senior citizen (65 years), taxable income ₹5.5 lakh (Old Regime)
Income exceeds the old regime’s ₹5 lakh threshold, so no rebate is available here — the individual pays tax on the full slab computation under the old regime. Switching to the new regime, where the threshold is ₹12 lakh, would make this same income fully rebate-eligible.
Example 5: Non-resident Indian, taxable income ₹8 lakh (New Regime)
Despite falling well within the ₹12 lakh limit, the individual cannot claim the rebate at all, since Section 87A is restricted to resident individuals. Full slab-rate tax applies.
Old Regime vs New Regime: Which Rebate Threshold Matters More?
For most taxpayers with taxable income between ₹5 lakh and ₹12 lakh, the new regime’s higher rebate threshold makes it the clear choice for minimizing tax outgo — provided they aren’t relying heavily on deductions (like home loan interest, 80C investments, or HRA) that are only available under the old regime. Taxpayers who claim substantial deductions may still find the old regime cheaper in absolute terms even without full 87A benefit, so a side-by-side comparison of both regimes each year remains worthwhile.
Claiming the Rebate
The rebate is not something you apply for separately — it is auto-computed by the tax filing utility (or by your employer’s payroll/TDS calculation) once you enter your total income and select your regime while filing the ITR. There’s no separate form or declaration required, though it’s worth double-checking the computation, particularly if you have capital gains or other special-rate income mixed in with regular income.
Key Takeaways
- New regime: rebate up to ₹60,000 for taxable income up to ₹12 lakh; effectively ₹12.75 lakh gross for salaried individuals after standard deduction.
- Old regime: rebate remains capped at ₹12,500 for taxable income up to ₹5 lakh.
- Only resident individuals qualify — NRIs, HUFs, AOPs, BOIs, and companies are excluded.
- Capital gains from equity (both LTCG and STCG) and flat-rate incomes like lottery/gaming winnings do not qualify for the rebate.
- Marginal relief prevents a steep tax jump for incomes just above the ₹12 lakh threshold.
- The Union Budget 2026 kept these limits unchanged from FY 2025-26.
This article is for general informational purposes and reflects the rules applicable for FY 2025-26 (AY 2026-27) / Tax Year 2026-27 as announced. For decisions specific to your financial situation, it’s advisable to consult a qualified tax professional or chartered accountant, since individual circumstances (multiple income heads, capital gains, residency status) can significantly affect the actual computation.
