Section 87A Tax Rebate — Who Gets Zero Tax Up to Rs.12 Lakh in FY 2025-26

Section 87A Tax Rebate — Who Gets Zero Tax Up to Rs.12 Lakh in FY 2025-26

Section 87A of the Income-tax Act, 1961 is an income-tax rebate that cancels a resident individual's entire tax liability when total income stays within the prescribed ceiling. For Financial Year 2025-26 (Assessment Year 2026-27) and FY 2026-27 (AY 2027-28), the new tax regime pairs restructured slabs with a rebate ceiling of Rs. 12 lakh — making it a genuine zero-tax band, not a low-tax band. Salaried taxpayers stretch that ceiling further to Rs. 12.75 lakh gross salary through the Rs. 75,000 standard deduction. Everything above that threshold, and everything involving capital gains, works very differently.

What Section 87A Actually Says — and Why the Wording Matters

Section 87A grants a rebate from the amount of income-tax — not a deduction from income. That distinction is legally significant. A deduction reduces the income on which tax is computed; a rebate reduces the tax itself, after slab computation, rupee for rupee until it hits the ceiling.

The statutory conditions are:

1. The assessee must be an individual (not HUF, firm, company, AOP or BOI).
2. The individual must be a resident under Section 6 of the Act (ordinary resident or not-ordinarily resident; NRIs are excluded).
3. Total income — the income remaining after all Chapter VI-A deductions and other permissible adjustments — must not exceed the prescribed limit for the chosen regime.
4. The rebate equals the lower of actual income-tax computed or the prescribed ceiling.

Two numbers define the landscape for FY 2025-26 and FY 2026-27:

A critical timing point: the rebate applies after computing basic slab tax but before adding the 4% Health and Education Cess. Once the rebate brings basic tax to zero, there is nothing left to load cess on. This is why income within the ceiling is truly tax-free — cess and surcharge both collapse to nil.

New Tax Regime Slabs and the Mechanics of the Rs. 60,000 Rebate

Finance Act 2025 restructured the new regime slabs effective FY 2025-26 and simultaneously raised the 87A ceiling to Rs. 12 lakh. The revised slabs are:

Tax on exactly Rs. 12,00,000:

• Rs. 4–8 lakh at 5% = Rs. 20,000
• Rs. 8–12 lakh at 10% = Rs. 40,000
• Total slab tax = Rs. 60,000
• Section 87A rebate = Rs. 60,000 (entire tax cancelled)
• Net tax = Rs. 0; cess = Rs. 0

The rebate ceiling of Rs. 60,000 is precisely calibrated to equal the slab tax on Rs. 12 lakh. Any income within Rs. 12 lakh produces a tax below Rs. 60,000, which is fully absorbed.

The Salaried Taxpayer's Additional Buffer

Salaried employees and pensioners are entitled to a standard deduction of Rs. 75,000 under the new regime (raised from Rs. 50,000 by Finance Act 2024). This reduces gross salary before arriving at total income:

• Gross CTC: Rs. 12,75,000
• Less standard deduction: Rs. 75,000
• Total income: Rs. 12,00,000 → 87A rebate = full tax → Rs. 0 net tax

The Rs. 12.75 lakh threshold applies only to salary or pension income. A freelancer, consultant, or investor with Rs. 12.75 lakh total income is not salaried, gets no standard deduction under the new regime, and will have total income of Rs. 12.75 lakh — above the ceiling, attracting full slab tax (subject to marginal relief).

Who Can and Cannot Claim Section 87A

Knowing who qualifies saves you from filing errors that trigger unnecessary demand notices.

Eligible to claim:

• Resident individual — whether ordinarily resident (ROR) or not-ordinarily resident (RNOR) as determined under Section 6
• Senior citizens (age 60–80) and super senior citizens (age 80+) who are resident in India — eligible under both regimes, subject to the respective income ceiling
• Individual partners in a firm — but only for their personal ITR, not for the firm's return

Not eligible:

• Non-resident Indians (NRIs): The statutory word "resident" is unambiguous. An NRI whose India-sourced income falls under Rs. 12 lakh still pays full slab tax on every rupee.
• Hindu Undivided Families (HUFs): HUFs file their own tax return but are not individuals under the Act — Section 87A does not apply.
• Companies, LLPs, firms, AOPs, BOIs: None are individuals.
• Resident individuals whose total income exceeds the ceiling: No partial rebate exists once income crosses Rs. 12 lakh (new regime) or Rs. 5 lakh (old regime) — only marginal relief can soften the cliff.

The NRI point trips up returning Indians or those in split-year residency situations. If you spent 182 days or more outside India in FY 2025-26, verify your residential status under Section 6 before assuming Section 87A applies to you.

Marginal Relief: How the Tax Cliff Gets Smoothed — and Where It Stops

The design of Section 87A creates a sharp discontinuity: earn Rs. 12,00,000 and pay Rs. 0; earn Rs. 12,00,001 and the Rs. 60,000 rebate vanishes, leaving a slab-tax bill of roughly Rs. 60,000 — all triggered by one extra rupee. Parliament provides marginal relief to prevent this absurdity within a band.

The marginal relief rule: Tax payable cannot exceed the amount by which total income exceeds Rs. 12,00,000.

In formula terms, tax payable (after marginal relief) = Lower of:

1. Slab tax computed (without 87A rebate), or
2. Total income minus Rs. 12,00,000

This smoothing mechanism works within the 15% slab (Rs. 12–16 lakh). The breakeven point — where the slab tax on the excess equals the excess itself — works out to approximately Rs. 12,70,588. At this exact income, the 15% slab tax on the amount above Rs. 12 lakh equals that excess, so marginal relief is zero. Above Rs. 12,70,588, normal slab tax applies in full.

Marginal Relief Illustrated

At Rs. 12,75,000, slab tax (Rs. 71,250) is less than the excess (Rs. 75,000), so the formula selects slab tax — no marginal relief reduction applies.

The planning insight: If your total income is projected between Rs. 12,00,001 and Rs. 12,70,000, marginal relief limits your tax to no more than the income above Rs. 12 lakh plus cess. At Rs. 12,10,000, you pay Rs. 10,400 — not Rs. 63,960. But once income breaches Rs. 12,70,588, you revert to full slab taxation. The cost of that final increment is disproportionate.

Worked Example: Four Taxpayer Profiles, Four Distinct Outcomes

These examples use the new tax regime for FY 2025-26 (AY 2026-27), unless stated otherwise. No capital gains are included in the first two.

Arjun — Salaried Developer, Gross CTC Rs. 12,75,000

• Standard deduction: Rs. 75,000
• Total income: Rs. 12,00,000
• Slab tax: Rs. 60,000
• 87A rebate: Rs. 60,000
• Cess: Rs. 0
• Net tax payable: Rs. 0

Arjun's employer must correctly record his new regime election on Form 12BB at the start of the year. If Form 12BB defaults to the old regime, TDS will be over-deducted and Arjun will have to claim a refund through his ITR — inconvenient but recoverable.

Priya — Salaried Manager, Gross CTC Rs. 13,25,000

• Standard deduction: Rs. 75,000
• Total income: Rs. 12,50,000
• Slab tax: Rs. 60,000 + 15% × Rs. 50,000 = Rs. 67,500
• Excess over Rs. 12L: Rs. 50,000
• Marginal relief: Rs. 67,500 − Rs. 50,000 = Rs. 17,500
• Tax after relief: Rs. 50,000
• Cess @4%: Rs. 2,000
• Net tax payable: Rs. 52,000

Priya earns Rs. 50,000 more than Arjun above the threshold and pays Rs. 52,000 in tax — precisely her excess income plus cess. Marginal relief ensures she is not penalised for earning slightly more than the zero-tax band.

Meena — NRI, India Rental Income Rs. 10,00,000

• Resident status: Non-resident individual
• Section 87A: Not available
• Tax (new regime, NRI): 5% × Rs. 4L + 10% × Rs. 2L = Rs. 30,000
• Cess @4%: Rs. 1,200
• Net tax payable: Rs. 31,200

A resident Indian with the same Rs. 10 lakh income would pay zero tax via 87A. The difference — Rs. 31,200 — is entirely due to residential status. Meena should verify her residency under Section 6 carefully every year, especially in years where she spends significant time in India.

Rajiv — Salaried, Rs. 9,75,000 Salary + Rs. 2,00,000 LTCG from Listed Equity MF

• Standard deduction: Rs. 75,000
• Total income (salary): Rs. 9,00,000
• Taxable LTCG u/s 112A: Rs. 2,00,000 − Rs. 1,25,000 exempt = Rs. 75,000
• Total income for 87A threshold check: Rs. 9,00,000 + Rs. 75,000 = Rs. 9,75,000 → within Rs. 12L → 87A eligible
• Slab tax on Rs. 9,00,000: 5% × Rs. 4L + 10% × Rs. 1L = Rs. 30,000 → Fully rebated under 87A (Rs. 30,000 < Rs. 60,000 ceiling)
• LTCG tax @12.5% on Rs. 75,000 = Rs. 9,375 — NOT rebated under 87A
• Cess on Rs. 9,375 = Rs. 375
• Net tax payable: Rs. 9,750

Despite total income being within the zero-tax band, Rajiv pays Rs. 9,750. The rebate does not touch special-rate income.

Capital Gains and the Section 87A Blind Spot

The most expensive misconception around Section 87A is the assumption that it cancels tax on all income below Rs. 12 lakh, including capital gains. It does not.

Section 87A rebate cannot be set off against tax computed under:

• Section 112A — Long-term capital gains (LTCG) on listed equity shares and equity-oriented mutual funds; taxable at 12.5% on gains above Rs. 1,25,000 per year (rate and exemption applicable from July 23, 2024 onwards, i.e., throughout FY 2025-26)
• Section 111A — Short-term capital gains (STCG) on listed equity and equity-oriented funds; taxable at 20% (applicable from July 23, 2024)
• Section 115BBH — Virtual digital assets (crypto, NFTs); taxable at 30% with no deductions

The ITR portal computes these taxes in separate schedules (Schedule CG, Schedule VDA). The 87A rebate applies only to the regular slab tax. If your total slab tax after rebate is nil but you have LTCG tax of Rs. 9,375, you owe Rs. 9,375 plus cess — there is no further offset mechanism.

This is not a new position. The Central Board of Direct Taxes (CBDT) made this explicit following the AY 2024-25 portal controversy, where the system briefly — and erroneously — allowed 87A against STCG u/s 111A before correcting the computation. Taxpayers who relied on that erroneous computation received demand notices. For FY 2025-26 and beyond, the portal correctly separates these computations from the start.

Planning note: If you are investing in equity mutual funds and your salary keeps you just inside the Rs. 12 lakh band, be precise. Rs. 5,000 of additional taxable LTCG does not push you out of 87A (your total income still stays within Rs. 12 lakh), but that LTCG itself bears 12.5% tax regardless. Model this separately each financial year before redemptions.

Old Regime Section 87A — When the Smaller Rebate Still Wins

The old regime retains Section 87A with its pre-2023 parameters: income ceiling of Rs. 5 lakh, maximum rebate Rs. 12,500. These numbers have not changed despite all the new regime enhancements.

Tax on Rs. 5,00,000 (old regime):

• Up to Rs. 2.5L: Nil
• Rs. 2.5–5L at 5%: Rs. 12,500
• 87A rebate: Rs. 12,500
• Net tax: Rs. 0

The old regime's standard deduction is Rs. 50,000 for salaried employees. So a salaried person with gross salary up to Rs. 5,50,000 who makes no deductions arrives at Rs. 5,00,000 total income — zero tax under old regime 87A.

Where it gets interesting is the deduction stack. Add Chapter VI-A deductions:

A salaried individual with gross income of Rs. 9,00,000, claiming Rs. 1,50,000 (80C) + Rs. 50,000 (80D) + Rs. 50,000 (std ded) = Rs. 2,50,000 in deductions, arrives at total income of Rs. 6,50,000 — above the old regime's 87A ceiling of Rs. 5 lakh. No rebate.

But the same person with a home loan adding Rs. 2,00,000 in Section 24(b) interest: total income = Rs. 9,00,000 − Rs. 50,000 − Rs. 1,50,000 − Rs. 50,000 − Rs. 2,00,000 = Rs. 4,50,000 → within Rs. 5 lakh → 87A applies → zero tax.

Crucially, for taxpayers with disability certificates under Section 80U (Rs. 75,000 or Rs. 1,25,000 deduction depending on severity) or significant medical expenditure under Section 80DDB, the old regime can pull income deep into the 87A zone even at moderately higher gross incomes. Run both regimes each year — the numbers shift with every EMI change, pay revision, or policy maturity.

Common Mistakes That Cost Taxpayers Money

1. Treating gross salary as total income

Form 16 Part B shows gross salary. Total income is gross salary minus standard deduction, minus any other eligible deductions. A taxpayer with Rs. 13,00,000 gross salary may have Rs. 12,00,000 total income (after Rs. 75,000 standard deduction, Rs. 25,000 family floater premium under 80D in old regime) — eligible for 87A, but will miss it if they assume gross income disqualifies them.

2. NRIs claiming Section 87A on Indian income

An NRI with Rs. 8 lakh in rental income from India, filing ITR-2, has no legal basis to claim 87A. Doing so triggers a defective return notice under Section 139(9), demands, and interest under Section 234B/234C on the unpaid tax.

3. Assuming 87A offsets LTCG or crypto tax

See Rajiv's example above. The portal now correctly restricts the rebate, but taxpayers doing manual calculations before filing often get this wrong. Always check Schedule CG and Schedule VDA separately in your ITR computation.

4. Ignoring marginal relief when projecting year-end income

A bonus received in March that takes total income from Rs. 12.05 lakh to Rs. 12.35 lakh does not increase your tax by Rs. 30,000. Marginal relief caps the additional tax at Rs. 30,000 (the income above the threshold) plus cess. Many taxpayers request unnecessary advance tax adjustments based on an inflated worst-case estimate.

5. Failing to declare regime choice on Form 12BB

Salaried employees who want the new regime's higher 87A ceiling must inform their employer via Form 12BB at the start of the financial year. An employer defaulting to the old regime will compute TDS as if the 87A ceiling is Rs. 5 lakh — collecting excess TDS all year. You can correct this at ITR time (ITR due: July 31, 2026 for AY 2026-27), but the refund takes 8–16 weeks.

6. HUFs filing ITR claiming 87A

HUFs are a separate taxable entity. The rebate under Section 87A does not apply. An HUF ITR that claims 87A will be rejected or will generate a demand after assessment.

7. Carrying forward last year's regime choice without reviewing

The new regime is now the default for individuals. If you took the old regime in FY 2024-25 to claim large deductions, verify whether those deductions persist in FY 2025-26 before staying in the old regime. A change in home loan status, HRA city, or employer policies can shift the optimal choice.

How to Claim Section 87A Correctly When Filing Your ITR

The rebate is not a separate application — it flows automatically from the computation. But you must execute these steps correctly:

1. Log in to the e-filing portal (incometax.gov.in) → File → File Income Tax Return → AY 2026-27 (for FY 2025-26)
2. Select the correct ITR form: ITR-1 (Sahaj) for salary + one house property + other sources ≤ Rs. 50 lakh; ITR-2 if you have capital gains or more than one property; ITR-3 for business/professional income
3. Declare your regime — this is the toggle that determines whether 87A applies against Rs. 12 lakh (new) or Rs. 5 lakh (old)
4. Enter income details and the portal auto-computes slab tax under the chosen regime
5. Check Schedule CG if you have capital gains — verify the portal is showing the 87A rebate only against slab income, not against 112A/111A tax
6. Cross-verify Form 26AS and AIS/TIS (Annual Information Statement / Taxpayer Information Summary) for TDS credits. Excess TDS over net tax payable becomes a refund, processed directly to your bank account on record
7. Verify and e-verify within 30 days of submission using Aadhaar OTP, net banking, DEMAT account EVC, or Bank ATM EVC

Key due dates:

• AY 2026-27 (FY 2025-26): July 31, 2026 for non-audit individuals
• AY 2027-28 (FY 2026-27): July 31, 2027 for non-audit individuals
• Tax audit cases: October 31 of the relevant assessment year
• Revised return: December 31 of the relevant assessment year (if you need to correct a mistake)

If your employer has already applied the 87A rebate in monthly TDS (because you submitted Form 12BB correctly), your net TDS deducted should be close to nil. The ITR confirms that position and processes any small residual refund.

Old Regime vs New Regime: A Practical Decision Framework

Rather than a generic comparison, here is the decision logic that applies most often in practice:

Prefer new regime (Rs. 12L 87A) if:

• Your total deductions under Chapters VI-A and Section 24(b) are less than approximately Rs. 3.75 lakh
• You do not have significant HRA that exceeds the standard deduction benefit differential
• Your income is between Rs. 9 lakh and Rs. 12 lakh with modest investments

Consider old regime if:

• Home loan interest (Section 24b) is Rs. 2 lakh or more AND you also have 80C at Rs. 1.5 lakh plus 80D contributions
• Your HRA exemption is large (metro city with high rent)
• You have Section 80U (disability) or 80DDB (specified medical treatment) deductions that pull taxable income dramatically below actual income
• Gross income is between Rs. 5 and Rs. 7 lakh and the deduction stack gets you inside the old regime's Rs. 5 lakh 87A threshold

The comparison must be re-run every financial year. Bonuses, property sales, EMI completions, parent age (affecting 80D), and regime-default changes by your employer can all shift the optimal choice within a single year.

Key Takeaways

• Section 87A under the new regime provides a rebate of up to Rs. 60,000, equal to the full tax on Rs. 12 lakh income — making total income up to Rs. 12 lakh genuinely zero-tax for resident individuals.
• Salaried taxpayers add Rs. 75,000 standard deduction, stretching the effective zero-tax gross salary threshold to Rs. 12.75 lakh; self-employed individuals have no such buffer.
• NRIs, HUFs, firms and companies cannot claim Section 87A — only resident individuals qualify, regardless of how low their income is.
• Marginal relief applies between Rs. 12,00,001 and approximately Rs. 12,70,588, capping tax at the excess income above Rs. 12 lakh plus cess — so crossing the threshold by a small amount does not trigger a catastrophic tax jump.
• Section 87A does not offset LTCG tax (Section 112A), STCG tax (Section 111A) or crypto tax (Section 115BBH) — these special-rate taxes are payable even if your slab income is fully rebated.
• The old regime's 87A ceiling remains Rs. 5 lakh with a maximum Rs. 12,500 rebate — still valuable for taxpayers with large deduction stacks that pull taxable income below Rs. 5 lakh.
• Claim the rebate by selecting the correct regime in your ITR, verifying capital gains schedules separately, and filing by July 31, 2026 (AY 2026-27) or July 31, 2027 (AY 2027-28) for non-audit cases.