Section 87A Rebate Explained: How to Pay Zero Tax up to Rs 12 Lakh Income in AY 2026-27

Budget 2025 comes with the biggest tax relief for middle-class families, which was brought through a rebate under Section 87A and through slab rates.

If you file an income tax return for F.Y 2025-26 (A.Y 2026-27), then understanding of this section is necessary to minimise the tax liability.

What is Section 87A?

Section 87A allows a resident individual taxpayer to claim a rebate (a direct deduction) on their tax liability, provided their total taxable income stays within a specified limit. It does not reduce your total income, but it reduces tax liability fully or partially.

The rebate is applicable on the total tax liability as per slabs, but before adding 4% health and education cess.

Who Can Claim It?

• Must be a resident individual (not a HUF, LLP, Firm, Company, AOP/BOI)
• Non- resident Indians (NRIS) cannot claim this rebate even if their Indian income is low.

Rebate Limits for FY 2025-26 (AY 2026-27)

Important exclusion: The rebate does not apply to income, which taxed at special rates i.e short-term capital gain under 111A and long-term capital gain under 112A or any special rate income.

It only applies to income, which is taxed at normal rates.

However, the unexhausted basic exemption limit can be set off against these special rate incomes.

Note: You can claim the benefit of a rebate against the special rate income by opting for the old regime.

How to Calculate It – Step by Step

1. Calculate Gross Total Income (salary, business, capital gains, other sources)
2. Subtract eligible deductions (80C, 80D, etc. — only under old regime)
3. Arrive at Total Taxable Income
4. Compute tax payable as per slab rates
5. If income is within the limit, deduct the rebate (capped at Rs 60,000 new regime/Rs 12,500 old regime, or actual tax payable, whichever is lower)
6. Add 4% cess on the balance tax

Example 1: New Tax Regime: Income within Limit

Mr Chaitanya, a salaried resident, earns Rs 12,75,000 in FY 2025-26 and opts for the new regime.

• Standard deduction: Rs 75,000
• Taxable income: Rs 12,75,000 − Rs 75,000 = Rs 12, 00,000
• Tax as per the new regime slabs on Rs 12,00,000 works out to Rs 60,000
• Since taxable income does not exceed Rs 12,00,000, rebate of Rs 60,000 applies in full

Tax payable: Rs 0

This is why you will often hear “income up to Rs 12.75 lakh is tax-free” for salaried individuals: the standard deduction plus the rebate combines to nil out tax entirely.

Example 2: New Tax Regime — Income Slightly Above Rs 12 Lakh (Marginal Relief)

Mr. Khush has taxable income of Rs 12,10,000 (new regime, no standard deduction in this case say it’s business income).

Without marginal relief, crossing Rs 12 lakh by even Rs 1 would disqualify her from the entire rebate, creating a tax jump far bigger than the extra income. Marginal relief fixes this:

• Excess income over Rs 12 lakh (A) = Rs 12,10,000 − Rs 12,00,000 = Rs 10,000
• Tax on Rs 1,210,000 as per slabs (B) = roughly Rs 61,500 (illustrative)
• Since B (Rs 61,500) > A (Rs 10,000), rebate under marginal relief = B − A = Rs 51,500
• Tax payable = B − rebate = Rs 61,500 − Rs 51,500 = Rs 10,000 (equal to the excess income)

In effect, he pays tax only equal to the amount by which her income exceeds Rs 12 lakh, not the full slab-rate tax. Marginal relief under the new regime phases out by around Rs 12.75 lakh of income beyond that; full slab rates apply with no relief.

Note: Such a marginal relief benefit is not available under the old regime; hence, if you cross Rs 5 lakh by a small amount & you won’t be eligible for a rebate.

Example 3: Income Includes Special Rate Income

Ms Maitry has a salary income of Rs 6,50,000 and short-term capital gains (STCG) under Section 111A of Rs 1,00,000, taking total income to Rs 7,50,000, under the new regime.

Even though his slab-rate income (Rs 6,50,000) is within Rs 12 lakh.

More importantly, the rebate cannot be applied against the tax on the STCG portion, only against tax on the Rs 6,50,000 taxed at slab rates.

Tax payable:

• On normal Income: (6,50,000 – 4,00,000)*5% =12,500
• On STCG 111A: 1,00,000*20%=20,000
• Total tax: 32,500
• Less: rebate (12,500)
• Tax Payable: 20,000 +4% HEC = 20,800