Section 87A rebate explained for FY 2026-27 — zero tax up to ₹12 lakh under the new regime, marginal relief, and old vs new regime comparison.
Section 87A is the rebate that effectively turns the new tax regime into a zero-tax structure for many middle-income earners. For FY 2025-26 and continuing into FY 2026-27, the new regime offers a rebate that wipes out tax liability for resident individuals with total income up to ₹12 lakh — when combined with the ₹75,000 standard deduction available to salaried taxpayers, this pushes the effective zero-tax salary threshold even higher. Understanding the boundary precisely matters because just one rupee above the threshold triggers a sharp tax cliff.
Section 87A Under the New Tax Regime
Under the new regime, a resident individual whose total income does not exceed the prescribed threshold gets a rebate of the entire tax payable, subject to a maximum. For FY 2025-26 and FY 2026-27, the rebate is structured so that no tax is payable on total income up to ₹12 lakh. With a salaried taxpayer's ₹75,000 standard deduction, gross salary up to ₹12.75 lakh effectively comes home tax-free.
- Available only to resident individuals
- New regime: rebate makes tax nil up to ₹12 lakh total income
- Old regime: rebate available up to ₹5 lakh total income, capped at ₹12,500
- Combined with ₹75,000 standard deduction (salary), effective zero-tax salary is ₹12.75 lakh
- HUFs and non-residents do not qualify for Section 87A
Marginal Relief at the Threshold
Just above the ₹12 lakh ceiling, marginal relief ensures that the additional tax does not exceed the additional income. For example, someone earning ₹12.10 lakh would otherwise have a tax that overshoots the incremental ₹10,000 — marginal relief caps the tax at the incremental income above the threshold so the cliff is smoothed. Without marginal relief, the system would punish narrow income increases disproportionately.
Old Regime Rebate Continues — But Smaller
The old regime still offers Section 87A relief, but only up to total income of ₹5 lakh with a maximum rebate of ₹12,500. Beyond that, every rupee of income is taxed at the slab rate. The old regime continues to be attractive for taxpayers with large deductions (home loan interest, LIC, PPF, NPS, HRA, donations), but for most middle-income salaried earners the new regime with 87A rebate now delivers a better effective tax outcome.
Capital Gains and 87A Interaction
A nuance often missed: Section 87A rebate is not available against tax on long-term capital gains on listed equity under Section 112A or short-term capital gains under Section 111A or under Section 115BBH on virtual digital assets. So a taxpayer with ₹10 lakh salary and ₹3 lakh equity LTCG can still face tax on the LTCG portion above the ₹1.25 lakh exempt limit even if the salary portion gets fully rebated.
Old Regime 87A — When It Still Helps
Under the old regime, the ₹5 lakh threshold for Section 87A is unchanged. After standard deduction of ₹50,000 and Section 80C contributions, a salaried taxpayer with gross income up to about ₹7 lakh can still come within the old regime's 87A net. For taxpayers with significant HRA, home loan interest and Chapter VI-A deductions on top, the old regime can produce a lower overall tax than the new regime even with the latter's higher 87A threshold.
Surcharge and Cess Interaction
Section 87A operates after computing basic tax but before adding surcharge and cess. So once the rebate brings the tax to zero, no surcharge or cess is payable — the entire indirect-tax chain collapses to nil. This is why the ₹12 lakh new-regime threshold is referred to as a true zero-tax band, not a low-tax band. Crossing the threshold by even a small amount triggers tax plus cess on the full amount above the threshold, subject to marginal relief.
Section 87A also interacts with Section 80U (disability), Section 80DDB (medical treatment for specified diseases) and other personal-allowance deductions available under the old regime. For taxpayers with disabilities or significant medical expenditure, the old regime can pull effective taxable income well below ₹5 lakh, locking in the 87A rebate plus the personalised deductions. Run the calculation under both regimes annually because life circumstances change and the regime that worked last year may not be optimal this year.
Conclusion
Section 87A under the new regime has effectively raised the income-tax zero band well above ₹12 lakh for most salaried Indians. Choose your regime, claim your standard deduction, manage capital gains separately, and the rebate does the rest. Run the calculation under both regimes every year — your relative position can shift quickly with bonuses, capital gains and changing deductions.
