What is Section 87A — The Income Tax Rebate
Section 87A of the Income Tax Act 1961 provides a rebate — a direct reduction in the income tax payable — to resident individual taxpayers whose total income falls below a specified threshold. Unlike a deduction which reduces taxable income before tax computation, a rebate is applied directly to the tax computed — effectively functioning as a full offset of tax liability up to the rebate amount.nnThe rebate under Section 87A has undergone significant revisions over the years to progressively benefit lower and middle-income taxpayers. In FY 2025-26, the rebate differs based on the tax regime chosen. Under the new tax regime, the rebate is Rs.60,000 for individuals with total income up to Rs.12,00,000 — the largest Section 87A rebate ever provided. Under the old tax regime, the rebate remains at Rs.12,500 for total income up to Rs.5,00,000.nnSection 87A is available exclusively to resident individuals — non-resident individuals, HUFs, firms, companies, and other entities do not qualify. The rebate is applied after computing income tax on total income at applicable slab rates and before adding surcharge and cess. If the computed tax is less than the rebate amount, the entire tax is reduced to nil — the excess rebate amount is not refunded. Surcharge and cess are not computed on the rebated amount — they apply only when actual tax payable after rebate is positive.
Section 87A Rebate — New Regime vs Old Regime FY 2025-26
The divergence in Section 87A treatment between the two regimes is one of the most important distinctions for tax planning in FY 2025-26. Understanding how each regime's rebate interacts with different income levels allows taxpayers to make informed decisions.nnUnder the new regime, the rebate of Rs.60,000 applies when total income does not exceed Rs.12,00,000. The tax computed on Rs.12,00,000 under the new regime slabs (nil on Rs.3L, 5% on Rs.4L = Rs.20,000, 10% on Rs.3L = Rs.30,000, 15% on Rs.2L = Rs.30,000) totals Rs.80,000. The rebate of Rs.60,000 reduces this to Rs.20,000. Wait — the rebate under new regime for FY 2025-26 is actually structured to make the tax nil for income up to Rs.12L, with the rebate equalling the full tax computed. The Finance Act 2025 has structured the rebate such that total tax on income up to Rs.12L is fully offset.nnUnder the old regime, the rebate is Rs.12,500 for total income up to Rs.5,00,000. Tax under old regime on Rs.5,00,000 is: nil on Rs.2.5L + 5% on Rs.2.5L = Rs.12,500. The rebate of Rs.12,500 offsets this exactly, making tax nil for income up to Rs.5L in the old regime. For any income above Rs.5L under the old regime, the 87A rebate is not available — tax applies from the first rupee above Rs.5L at 20% or 30%.
| Regime | Rebate Amount | Income Threshold | Effective Zero-Tax Income (Salaried) |
|---|---|---|---|
| New Tax Regime FY 2025-26 | Rs.60,000 | Total income up to Rs.12,00,000 | Rs.12,75,000 (after Rs.75,000 standard deduction) |
| Old Tax Regime FY 2025-26 | Rs.12,500 | Total income up to Rs.5,00,000 | Rs.5,00,000 (after Rs.50,000 standard deduction and 80C) |
| New Regime — income above Rs.12L | Nil — no rebate available | N/A | N/A |
| Old Regime — income above Rs.5L | Nil — no rebate available | N/A | N/A |
Section 87A and Capital Gains — When the Rebate Does NOT Apply
One of the most consequential and often misunderstood restrictions on Section 87A is its non-availability against income taxed at special rates. Capital gains taxed at special rates — short-term capital gains under Section 111A (equity shares, equity mutual funds at 20%), and long-term capital gains under Section 112A (equity at 12.5%) and Section 112 (non-equity at 20%) — are not eligible for the Section 87A rebate.nnThis means a taxpayer with total income of Rs.8 lakh comprising Rs.5 lakh salary income and Rs.3 lakh in short-term capital gains on equity (Section 111A at 20%) cannot use the Section 87A rebate to offset the tax on the Rs.3 lakh STCG. The tax on Rs.3 lakh STCG at 20% = Rs.60,000 must be paid. The Section 87A rebate of Rs.60,000 can only be applied against the tax computed on the salary income component at normal slab rates — and if that slab-rate tax is nil (because salary is below Rs.3L threshold), the rebate has nothing to offset.nnThis restriction was reinforced by a CBDT clarification and confirmed in multiple tax tribunal decisions. Taxpayers who have significant capital gains income — from stock trading, mutual fund redemption, or property sale — must carefully compute their Section 87A eligibility. The rebate applies only to tax computed at normal slab rates, not to tax computed at special rates. Mixing ordinary income and special rate income in an ITR requires careful computation to allocate the rebate correctly.
Zero Tax Calculation — How Rs.12,75,000 Becomes Tax-Free for Salaried
For salaried employees under the new tax regime in FY 2025-26, the path to zero tax with income up to Rs.12,75,000 works through two sequential steps. First, the standard deduction of Rs.75,000 reduces gross salary to taxable income: Rs.12,75,000 minus Rs.75,000 = Rs.12,00,000 taxable income. Second, tax on Rs.12,00,000 under new regime slabs is fully offset by the Section 87A rebate — resulting in zero net tax.nnIt is important to note that the zero-tax benefit ends sharply at the Rs.12 lakh taxable income threshold. A salaried employee earning Rs.12,76,000 gross has taxable income of Rs.12,01,000 after standard deduction — which exceeds the Rs.12 lakh rebate threshold. The Section 87A rebate is not available at all, and tax is computed on the full Rs.12,01,000 at regular rates. Tax on Rs.12,01,000 = approximately Rs.80,150 (plus cess Rs.3,206 = total Rs.83,356). This sharp cliff-edge at Rs.12 lakh taxable income means an employee earning Rs.12,01,000 pays approximately Rs.83,000 more in tax than an employee earning Rs.12,00,000.nnThis cliff effect creates a genuine incentive to ensure taxable income stays within Rs.12 lakh under the new regime. Employer NPS contributions under Section 80CCD(2) can help — if the employer contributes Rs.1,20,000 to NPS on behalf of the employee, the taxable salary is reduced by Rs.1,20,000. An employee earning Rs.13,20,000 gross with Rs.1,20,000 employer NPS has taxable income of Rs.13,20,000 minus Rs.75,000 standard deduction minus Rs.1,20,000 NPS = Rs.12,25,000 — however this exceeds Rs.12L so the rebate does not apply. Careful structuring is needed to benefit from the zero-tax band.
How to Claim Section 87A Rebate in ITR
Section 87A rebate is automatically computed by the income tax portal's ITR filing system when the taxpayer enters their total income and selects the applicable tax regime. The ITR computation sheet (Schedule IT) shows the tax on total income, then applies the Section 87A rebate as a deduction from the tax, arriving at the net tax payable before surcharge and cess. Taxpayers do not need to separately enter or claim the rebate — the system applies it automatically.nnFor offline ITR preparation, the rebate is computed manually: calculate income tax on total income at applicable slab rates. If total income does not exceed Rs.12,00,000 (new regime) or Rs.5,00,000 (old regime), apply the corresponding rebate — Rs.60,000 (new) or Rs.12,500 (old) — to reduce the tax. If the computed tax is less than the rebate amount, the rebate reduces tax to zero (not below zero). If the computed tax exceeds the rebate amount, the rebate reduces tax by the full rebate, and the remaining balance plus cess is the net tax payable.nnA common mistake is claiming Section 87A rebate in cases where capital gains taxed at special rates push computed tax above the rebate amount. The ITR filing utility may incorrectly allow this in some versions — taxpayers and tax preparers must manually verify that the rebate is applied only against slab-rate tax and not against tax computed at special rates like 20% STCG or 12.5% LTCG.
