What is Section 87A Rebate?
Section 87A of the Income Tax Act 1961 is a rebate that wipes income tax to zero for resident individuals with taxable income up to a threshold. Under the new tax regime for FY 2025-26 (AY 2026-27), the rebate covers taxable income up to Rs 12,00,000 with a maximum rebate of Rs 60,000. Under the old regime the threshold stays Rs 5,00,000 with a maximum rebate of Rs 12,500.
Detailed definition
Section 87A was introduced by the Finance Act 2013 as a small relief for low-income resident individuals. It started at Rs 2,000 of rebate for taxable income up to Rs 5,00,000 and has been raised multiple times. The 2023 Union Budget switched the threshold under the new tax regime to Rs 7,00,000 with a Rs 25,000 ceiling. The 2025 Union Budget made the most consequential change yet by lifting the new-regime threshold to Rs 12,00,000 and the ceiling to Rs 60,000, effective FY 2025-26 onwards. This shift is the single biggest reason the new regime is now the default choice for nearly all salaried taxpayers below the Rs 15 to 20 lakh income band.
The mechanic is a credit against tax payable, not a deduction from income. You first compute tax on your taxable income at the relevant slab rates. If your taxable income falls at or below the threshold, the 87A rebate equals the lower of your computed tax or the maximum cap. The rebate cannot exceed your actual tax liability. After the rebate is applied, the 4 percent health and education cess is levied on the resulting amount, which is zero when the rebate fully absorbs the slab tax.
Marginal relief, codified in the Finance Act 2023 and continued in the Finance Act 2025, prevents a cliff-edge. Without it, a taxpayer with taxable income of Rs 12,00,001 in the new regime would suddenly owe roughly Rs 61,500. With marginal relief, the additional tax cannot exceed the additional income above Rs 12 lakh, smoothing the transition. The relief band typically ends near Rs 12,75,000 where regular slab tax catches up with the marginal-relief tax.
How it works (formula)
Step 1: Compute tax on taxable income at slab rates (T)
Step 2: If taxable income <= threshold (Rs 12L new / Rs 5L old):
Rebate = min(T, max cap) [cap is Rs 60,000 new / Rs 12,500 old]
Tax after rebate = T - Rebate = 0
Step 3: Marginal relief (new regime only):
If 12,00,000 < taxable income < ~12,75,000:
Tax payable = min(slab tax, taxable income - 12,00,000)
Step 4: Add 4% health and education cess on the result
The Section 87A rebate sits in the Income Tax Act between the slab tax calculation and the cess. It only neutralises slab tax, never the cess base before rebate, and never special-rate income like Section 111A or 112A capital gains in the new regime.
Worked example (FY 2025-26, new regime)
Riya is a salaried employee in Pune. Her gross salary in FY 2025-26 is Rs 12,75,000. She has no other income and chooses the new tax regime.
- Standard deduction: Rs 75,000 (new regime FY 2025-26 cap).
- Taxable income: 12,75,000 minus 75,000 = Rs 12,00,000.
- Slab tax (new regime slabs): 0 on first 4L + 5% on next 4L (Rs 20,000) + 10% on next 4L (Rs 40,000) = Rs 60,000.
- Section 87A rebate: min(Rs 60,000, Rs 60,000) = Rs 60,000.
- Tax after rebate: 60,000 - 60,000 = Rs 0.
- Health and education cess (4 percent): Rs 0.
New regime vs old regime: 87A side-by-side (FY 2025-26)
| Parameter | New tax regime | Old tax regime |
|---|---|---|
| 87A taxable income threshold | Rs 12,00,000 | Rs 5,00,000 |
| Maximum rebate amount | Rs 60,000 | Rs 12,500 |
| Standard deduction (salaried) | Rs 75,000 | Rs 50,000 |
| Effective tax-free gross salary | Rs 12,75,000 | Rs 5,50,000 (without 80C use) |
| Marginal relief above threshold | Yes, to about Rs 12,75,000 | Yes, to about Rs 5,07,000 |
| Rebate on Section 112A LTCG | Not allowed | Allowed |
| Section 80C, 80D, HRA, 24(b) home-loan interest | Not allowed | Allowed |
Common pitfalls
- Confusing gross salary with taxable income. The Rs 12 lakh threshold is on taxable income, not CTC. Salaried taxpayers must subtract the Rs 75,000 standard deduction before checking eligibility.
- Forgetting LTCG and STCG carve-outs in the new regime. Equity LTCG above Rs 1.25 lakh and equity STCG are taxed at special rates and do not benefit from the 87A rebate in the new regime.
- Picking the wrong regime. If you can deploy Rs 1.5 lakh of Section 80C, Rs 25,000 of Section 80D, Rs 2 lakh of Section 24(b) home-loan interest, and HRA, the old regime can still beat the new regime at higher salaries despite its lower 87A threshold.
- Filing as non-resident. NRIs cannot claim the rebate. If you were in India for fewer than 182 days, double-check residential status before claiming.
- Missing the marginal-relief calculation. Income just above Rs 12 lakh does not pay full slab tax. The marginal-relief formula caps your tax at the income above Rs 12 lakh until the band closes near Rs 12,75,000.
Related terms
Related calculators on 3Tej
Plug your salary, deductions, and regime choice into one of these free Indian tax calculators to see whether the 87A rebate makes your tax zero:
Frequently asked questions
What is the Section 87A rebate limit for FY 2025-26?
For FY 2025-26 (AY 2026-27) under the new tax regime, Section 87A grants a full rebate up to Rs 12,00,000 of taxable income with a maximum rebate of Rs 60,000. Under the old regime, the threshold stays at Rs 5,00,000 with a maximum rebate of Rs 12,500. A salaried taxpayer also gets the Rs 75,000 standard deduction in the new regime, which effectively makes gross salary up to Rs 12,75,000 tax-free.
Who is eligible to claim the 87A rebate?
Only resident individuals can claim the rebate, including senior citizens. HUFs, partnership firms, LLPs, companies, and non-resident individuals are not eligible. The rebate applies to the income tax computed at slab rates and reduces it before adding health and education cess at 4 percent.
What is marginal relief under Section 87A?
Marginal relief prevents a cliff-edge tax shock when income just crosses the Rs 12 lakh new-regime threshold. Without it, taxable income of Rs 12,00,001 would suddenly trigger a tax of around Rs 61,500. Marginal relief restricts the tax payable so that the extra tax is no more than the income earned above Rs 12 lakh. The marginal-relief band typically extends from Rs 12,00,000 to about Rs 12,75,000.
Does the 87A rebate apply to capital gains?
It applies to income taxed at slab rates. However, from FY 2024-25 onwards, special-rate income such as long-term capital gains under Section 112A (equity at 12.5 percent above Rs 1.25 lakh) and short-term capital gains under Section 111A (equity at 20 percent) is excluded from the 87A rebate under the new regime as clarified by the Finance Act 2025.
Can I claim 87A under both old and new regimes?
You choose one regime each year via Form 10-IEA for the old regime if you have business income, otherwise simply at return filing. The 87A rebate is calculated within whichever regime you pick. The new regime threshold of Rs 12 lakh is substantially more attractive than the old regime threshold of Rs 5 lakh, which is why most taxpayers below Rs 12 lakh income now default to the new regime.
Is the 87A rebate available for senior citizens?
Yes. Resident senior citizens (aged 60 to 80) and super-senior citizens (above 80) can claim the rebate. In the new regime the threshold is the same Rs 12 lakh for all ages because the regime has no separate age-based basic exemption. In the old regime the basic exemption is higher for seniors but the 87A rebate threshold stays Rs 5 lakh of taxable income.
Sources and further reading
- Income Tax Act 1961, Section 87A, Income Tax Department, Government of India.
- Union Budget 2025-26, Finance Bill 2025, Ministry of Finance, Government of India: revised new-regime slabs and Rs 12 lakh 87A threshold.
- CBDT Circulars and Notifications, FY 2025-26, Central Board of Direct Taxes, on marginal relief mechanics.
- Income Tax e-filing portal, ITR utility for AY 2026-27 implementing the revised 87A rebate.
- Memorandum Explaining the Provisions of the Finance Bill 2025 (PIB Press Release, 1 February 2025) on the new Section 87A thresholds.