Section 87A & Section 156 Rebate: Why Tax May Still Be Payable Below ₹12 Lakh

1. Introduction

There is considerable confusion among taxpayers regarding the rebate available under section 87A of the Income-tax Act, 1961 and section 156 of the Income-tax Act, 2025, particularly after the enhanced rebate applicable from Financial Year 2025-26 / Assessment Year 2026-27 onwards. Many taxpayers understand the rebate limit as a complete exemption limit and assume that no income-tax can be payable if total income is within ₹12,00,000. This understanding is not correct in every situation. In this article, we will discuss the concept of rebate in detail, compare the relevant provisions under the Income-tax Act, 1961 and the Income-tax Act, 2025, and explain the important scenarios where rebate is available, restricted or not available at all.

Under the Income-tax Act, 1961, this rebate is governed by section 87A. Under the Income-tax Act, 2025, the corresponding provision is section 156. Both provisions are similar in nature and provide rebate from income-tax to eligible resident individuals.

Section 87A of the Income-tax Act, 1961 / section 156 of the Income-tax Act, 2025 does not make income exempt. It only grants a rebate from income-tax after the tax is first computed. Therefore, in certain cases, tax may still be payable even when the total income is within the rebate limit.

For Assessment Year 2026-27, under the new tax regime, a resident individual may get rebate up to ₹60,000 where total income does not exceed ₹12,00,000. Under the old tax regime, rebate remains available up to ₹12,500 where total income does not exceed ₹5,00,000.

However, this does not mean that ₹12,00,000 is the basic exemption limit. The basic exemption limit under the new tax regime is ₹4,00,000. The amount of ₹12,00,000 is only the upper income limit for claiming rebate under section 87A of the 1961 Act / section 156 of the 2025 Act, subject to the conditions and restrictions provided in the section.

This distinction is very important because many taxpayers see a tax demand even when their total income is below ₹12,00,000, especially where the income includes capital gains, lottery income, virtual digital asset income, unexplained income, or other income taxable at special rates.

We have tried to cover all relevant aspects in this article. However, if you still have any queries or require further clarification, you may contact us at the details mentioned at the end of this article.

2. Section 87A / Section 156 is a rebate, not an exemption

The first and most important point is that section 87A of the Income-tax Act, 1961 / section 156 of the Income-tax Act, 2025 is not an exemption provision. It is a rebate provision.

Under the new tax regime for AY 2026-27, the normal slab structure starts with nil tax up to ₹4,00,000. Thereafter, tax is calculated at 5%, 10%, 15%, 20%, 25% and 30%, depending upon the income slab.

Under the Income-tax Act, 1961, the new tax regime is contained in section 115BAC(1A). Under the Income-tax Act, 2025, the corresponding new tax regime provision is section 202(1).

Therefore, ₹12,00,000 is not the basic exemption limit. It is only the income limit up to which rebate under section 87A / section 156 may be available to an eligible resident individual.

In simple words:

Income up to ₹4,00,000 is not taxable under the new regime because of the basic exemption slab. Income above ₹4,00,000 and up to ₹12,00,000 becomes effectively tax-free only because of rebate under section 87A of the 1961 Act / section 156 of the 2025 Act, subject to statutory conditions.

3. What section 87A / section 156 provides

Section 87A of the Income-tax Act, 1961 / section 156 of the Income-tax Act, 2025 applies only to an individual resident in India.

Broadly, the rebate provision operates as under:

The Finance Act, 2025 amended section 87A with effect from 01.04.2026. Accordingly, for Financial Year 2025-26 / Assessment Year 2026-27, the new-regime rebate limit was increased from ₹7,00,000 to ₹12,00,000 and the maximum rebate was increased from ₹25,000 to ₹60,000.

The Income-tax Act, 2025 carries the same broad position in section 156. Section 156(2) provides rebate where the total income of a resident individual is chargeable under section 202(1), i.e., the new tax regime under the 2025 Act.

However, Finance Act, 2025 also inserted an important restriction in section 87A. Similarly, section 156(3) of the Income-tax Act, 2025 provides that the deduction under section 156(2) shall not exceed the income-tax payable as per the rates provided in section 202(1).

This means that the rebate is linked to normal slab-rate tax under the new regime and does not automatically eliminate tax payable on special-rate income.

This is the main reason why tax may still become payable even when total income is below ₹12,00,000.

4. Why tax may still be payable even when income is below ₹12 lakh

The phrase “no tax up to ₹12 lakh” should be understood carefully. It is broadly correct only where the income is taxable under normal slab rates and the assessee satisfies all conditions of section 87A of the 1961 Act / section 156 of the 2025 Act.

It is not a blanket exemption for every type of income.

Tax may still be payable where:

1. the assessee is not a resident individual;

2. the assessee opts for the old regime and income exceeds ₹5,00,000;

3. total income exceeds the prescribed rebate limit;

4. income includes special-rate income such as capital gains, lottery income, online gaming income, virtual digital asset income, unexplained income, etc.;

5. tax payable is in the nature of cess, surcharge, interest, late fee or penalty;

6. total income is increased during processing, assessment or reassessment beyond the eligible limit.

Thus, section 87A / section 156 gives relief only within the boundaries of the rebate provision. It cannot be treated as a general exemption from tax.

Important practical point: In many cases, because of the statutory limitation on rebate, the assessee may still be required to pay tax even when total income is within the rebate limit. However, this does not mean that tax planning or relief is not possible in every case. Depending upon the facts, nature of income, period of holding, type of capital gain, set-off eligibility, deductions, exemptions, regime selection and other applicable provisions, there may still be lawful ways to reduce or avoid tax liability, particularly in cases involving STCG, LTCG or other special-rate income. Since the correct treatment differs from case to case, professional advice should be taken before filing the return or responding to any demand. For case-specific guidance, you may contact us at the details mentioned at the end of this article.

5. Example 1: Normal income of ₹12 lakh under new regime — no tax payable

Assume a resident individual has salary income of ₹12,00,000 and opts for the new tax regime.

In this case, the entire tax of ₹60,000 is normal slab-rate tax under section 115BAC(1A) of the 1961 Act / section 202(1) of the 2025 Act. Therefore, rebate under section 87A / section 156 covers the full tax and the final tax payable becomes nil.

6 Example 2: Income below ₹12 lakh but includes STCG under section 111A / section 196

Assume a resident individual has the following income under the new regime:

Now, tax on normal income of ₹10,00,000 under section 115BAC(1A) of the 1961 Act / section 202(1) of the 2025 Act will be:

However, short-term capital gain under section 111A of the 1961 Act / section 196 of the 2025 Act is taxed separately at special rate. For transfers on or after 23.07.2024, STCG on STT-paid listed equity shares, equity-oriented mutual funds and units of business trust is taxable at 20%.

Therefore:

Thus, even though total income is only ₹11,00,000, tax is still payable because rebate under section 87A / section 156 under the new regime does not wipe out the special-rate tax.

7. Example 3: Only special-rate income below ₹12 lakh

Assume a resident individual has only STCG under section 111A of the 1961 Act / section 196 of the 2025 Act of ₹5,00,000 and no other normal income.

At first glance, the taxpayer may think that since total income is below ₹12,00,000, no tax is payable. However, this income is not normal slab income. It is special-rate capital gain income.

Since there is no normal slab-rate tax under section 115BAC(1A) of the 1961 Act / section 202(1) of the 2025 Act, rebate under section 87A / section 156 may not be available to reduce such special-rate tax under the new regime for AY 2026-27 onwards.

Therefore, tax may still be payable even though total income is below ₹12,00,000.

8. Rebate is specifically not available against LTCG under section 112A / section 198

Section 112A of the 1961 Act / section 198 of the 2025 Act deals with long-term capital gains on listed equity shares, equity-oriented mutual funds and units of business trust, subject to prescribed conditions.

Section 112A(6) of the 1961 Act specifically provides that where total income includes long-term capital gains covered by section 112A, rebate under section 87A is allowed only from the income-tax on total income as reduced by tax payable on such capital gains.

Similarly, under the Income-tax Act, 2025, section 198(7) provides that where total income includes long-term capital gains covered by section 198, rebate under section 156 shall be allowed from the income-tax on the total income as reduced by tax payable on such capital gains.

In simple terms:

Therefore, even if total income is within the rebate limit, tax on LTCG under section 112A of the 1961 Act / section 198 of the 2025 Act may still remain payable.

9. Special-rate incomes where tax may remain payable despite section 87A / section 156

The following are important examples where section 87A / section 156 may not fully remove tax because the income is taxable at special rates:

The important point is that after the Finance Act, 2025 amendment, the new-regime rebate under section 87A is restricted to tax payable as per the normal slab rates under section 115BAC(1A). Similarly, under section 156(3) of the Income-tax Act, 2025, rebate under section 156(2) cannot exceed tax payable as per rates under section 202(1).

Therefore, tax payable under special-rate provisions may continue to remain payable.

10. Cases where section 87A / section 156 rebate is not available at all

Section 87A of the 1961 Act / section 156 of the 2025 Act is not available in the following cases:

Important point: A resident but not ordinarily resident individual is still a resident for this purpose. Therefore, if other conditions are satisfied, such individual may claim rebate under section 87A / section 156. However, a non-resident individual cannot claim this rebate.

11. Rebate is not available where total income exceeds the prescribed limit

The income limit is checked with reference to total income, not gross receipts.

Therefore, where total income exceeds the prescribed limit, rebate under section 87A / section 156 is not available in the normal manner.

For example:

12. ₹60,000 rebate is not available under old regime

Another common mistake is that taxpayers apply the new regime rebate limit even while choosing the old regime.

This is incorrect.

The ₹60,000 rebate limit is applicable only where total income is chargeable to tax under section 115BAC(1A) of the 1961 Act / section 202(1) of the 2025 Act, i.e., the new tax regime. If the assessee chooses the old tax regime, the rebate is restricted to ₹12,500 and is available only where total income does not exceed ₹5,00,000.

Therefore:

13. Rebate is limited to income-tax and does not apply to interest, late fee or penalty

Section 87A of the 1961 Act / section 156 of the 2025 Act provides rebate from income-tax. It does not provide rebate from every amount payable under the Income-tax Act.

Therefore, section 87A / section 156 does not directly reduce the following:

For example, if a taxpayer is eligible for full rebate under section 87A / section 156 and income-tax becomes nil, but the return is filed late, late filing fee may still be payable if applicable. The rebate provision does not waive such fee.

Similarly, if tax on special-rate income remains payable and payment is delayed, interest consequences may arise separately.

14. Effect of agricultural income

Agricultural income is generally exempt, but in certain cases it is aggregated for rate purposes. Due to this rate impact, tax may increase.

If the tax computed after agricultural income aggregation exceeds the maximum rebate available under section 87A of the 1961 Act / section 156 of the 2025 Act, the excess tax may remain payable.

This does not mean that section 87A / section 156 is denied. It only means that the rebate is limited to the maximum statutory amount of ₹12,500 under the old regime or ₹60,000 under the new regime, as applicable.

15. Rebate may be withdrawn if income is increased during processing or assessment

Many times, the assessee claims rebate under section 87A / section 156 in the return of income because the returned total income is within the prescribed limit. However, if during processing, assessment, reassessment or appellate proceedings, total income is increased beyond the eligible limit, the rebate may be withdrawn.

Under the 1961 Act, processing of return is generally done under section 143(1). Under the 2025 Act, the corresponding processing provision is contained in section 270(1).

Example:

Since the total income now exceeds ₹5,00,000, rebate under section 87A of the 1961 Act / section 156 of the 2025 Act under the old-regime limit will not be available.

The same principle applies under the new regime if total income exceeds ₹12,00,000, subject to marginal relief provisions.

16. TDS deduction does not decide section 87A / section 156 eligibility

TDS is only tax already deducted at source. It does not decide whether rebate under section 87A / section 156 is available.

Eligibility for rebate depends upon:

1. residential status;

2. status of assessee;

3. total income;

4. tax regime selected;

5. nature of income;

6. special-rate tax restrictions.

Therefore:

17. Belated return is not by itself a ground to deny section 87A / section 156

Section 87A of the 1961 Act / section 156 of the 2025 Act does not provide that rebate will be denied merely because the return is filed after the due date.

Therefore, belated filing of return by itself should not deny rebate, provided the assessee otherwise satisfies the conditions of the rebate provision.

However, late filing fee under section 234F of the 1961 Act / section 428 of the 2025 Act, interest under sections 234A, 234B and 234C of the 1961 Act / sections 423, 424 and 425 of the 2025 Act, and other consequences may separately apply, wherever applicable.

18. Complete checklist: When section 87A / section 156 rebate is not available, not applied or restricted

19. Short conclusion

Section 87A / section 156 should be understood as a rebate provision and not as a complete exemption from tax. The benefit is available only to eligible resident individuals and is subject to the prescribed income limit, tax regime and nature of income. Therefore, where income includes special-rate income or any statutory restriction applies, tax may still be payable even when total income is below ₹12,00,000.

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