Budget 2025's headline announcement — zero income tax up to ₹12 lakh under the new regime — is the most talked-about provision in Indian personal taxation in recent years. But the devil is firmly in the details. The Section 87A rebate that delivers this zero-tax outcome does not apply to all income, does not work the same way under both regimes, and has created significant confusion around its interaction with capital gains, special-rate income, and the marginal relief provision. The Income Tax Department's own CPC has in the past computed tax incorrectly in intimations related to Section 87A claims on special-rate income — making this one of the most litigation-prone provisions of AY 2026–27. As a CA in Mumbai advising individuals across all income brackets, this guide provides a definitive, accurate explanation of how Section 87A works this filing season.
What Is Section 87A?
Section 87A of the Income Tax Act, 1961 provides a tax rebate — a direct reduction in the final tax payable — to resident individual taxpayers whose total income does not exceed a specified threshold. The rebate equals the amount of tax payable on the total income, subject to a maximum ceiling. For AY 2026–27, the rebate parameters differ by regime:
| Parameter | New Tax Regime | Old Tax Regime |
|---|---|---|
| Maximum income for rebate eligibility | ₹12,00,000 | ₹5,00,000 |
| Maximum rebate amount | ₹60,000 | ₹12,500 |
| Effective zero-tax threshold (salaried, with std. deduction) | ₹12,75,000 gross salary | ₹5,50,000 gross salary |
| Who qualifies | Resident individual only | Resident individual only |
| Applies to NRIs? | No | No |
| Applies to HUFs? | No | No |
The rebate under the new regime effectively means that a resident individual with total income (after standard deduction) of up to ₹12 lakh pays zero income tax — even though the slabs show 5%, 10% applicable on portions above ₹4 lakh. The rebate wipes out the slab-rate tax completely.
How the Rebate Works — The Exact Mechanics
Section 87A does not change the slab-rate calculation. Instead, it provides a credit against the final tax liability. Here is the precise computation under the new regime for AY 2026–27:
Example: Salaried Individual — Gross Salary ₹12,75,000 (New Regime)
| Gross Salary | ₹12,75,000 |
| Less: Standard Deduction | −₹75,000 |
| Net Taxable Income | ₹12,00,000 |
| Tax on ₹12,00,000 (per new regime slabs) | ₹60,000 |
| Less: Section 87A Rebate | −₹60,000 |
| Tax after rebate | ₹0 |
| 4% Health & Education Cess on ₹0 | ₹0 |
| Total Tax Payable | ₹0 |
Example: Income of ₹12,00,001 — The ₹1 Trap
| Total Income (after standard deduction) | ₹12,00,001 |
| Tax on ₹12,00,001 (per new regime slabs) | ₹60,000 + tax on ₹1 = ₹60,000.15 |
| Section 87A Rebate | NIL — income exceeds ₹12,00,000 |
| Tax after rebate | ₹60,000.15 |
| 4% Cess | ₹2,400 |
| Total Tax Payable | ≈₹62,400 |
The Critical Exception: Incomes Where Section 87A Does NOT Apply
This is where most of the confusion — and most of the defective returns — originates. Section 87A rebate applies only against tax computed at slab rates. It does not apply against tax on income taxed at special rates. For AY 2026–27, the following income types fall outside the rebate's scope:
| Income Type | Tax Rate | 87A Rebate Available? |
|---|---|---|
| STCG on listed equity / equity MF (Section 111A) | 20% | No |
| LTCG on listed equity / equity MF above ₹1.25L (Section 112A) | 12.5% | No |
| LTCG on other assets — property, gold, unlisted shares (Section 112) | 12.5% | No |
| Crypto / VDA income (Section 115BBH) | 30% | No |
| Lottery / horse race winnings (Section 115BB) | 30% | No |
| Salary income, interest, rent, business income (slab rates) | Slab rates | Yes |
| Dividends taxed at slab rates | Slab rates | Yes |
| Debt MF income (post Apr 2023) at slab rates | Slab rates | Yes |
Practical Scenarios — Does the Rebate Apply?
Scenario A: Salary ₹10L + STCG from Equity ₹2L (New Regime)
| Salary income (after std. deduction ₹75K) | ₹9,25,000 |
| STCG under Section 111A | ₹2,00,000 |
| Total income | ₹11,25,000 |
| Tax on salary ₹9,25,000 (slab rates) | ₹46,250 |
| Section 87A rebate on slab income (income ≤ ₹12L? Yes for slab portion) | Not straightforward — see below |
| Tax on STCG ₹2,00,000 @ 20% | ₹40,000 |
Scenario B: Salary ₹8L + LTCG from Equity ₹5L (New Regime)
| Salary income (after std. deduction ₹75K) | ₹7,25,000 |
| LTCG under Section 112A (₹5L − ₹1.25L exemption) | ₹3,75,000 taxable |
| Total income | ₹11,00,000 |
| Tax on salary ₹7,25,000 @ slab rates | ₹16,250 |
| Section 87A rebate (total income ≤ ₹12L — eligible) | −₹16,250 (wipes slab tax) |
| Tax on LTCG ₹3,75,000 @ 12.5% | ₹46,875 |
| 4% Cess on ₹46,875 | ₹1,875 |
Scenario C: Pure Salary ₹11L — No Capital Gains (New Regime)
| Gross salary | ₹11,00,000 |
| Less: Standard deduction | −₹75,000 |
| Net taxable income | ₹10,25,000 |
| Tax on ₹10,25,000 @ slab rates | ₹52,500 |
| Section 87A rebate (income ≤ ₹12L) | −₹52,500 |
| Tax after rebate | ₹0 |
Marginal Relief — Protecting You at the Threshold
The sharp cliff effect at ₹12,00,001 income is addressed by marginal relief — a provision that ensures no taxpayer pays more in tax than the amount by which their income exceeds the rebate threshold. Without marginal relief, earning ₹1 above ₹12 lakh could cost ₹60,000+ in tax (the full slab tax, no longer wiped by rebate). Marginal relief caps the tax at the amount of income above ₹12,00,000. So if your income is ₹12,10,000:
- Without marginal relief: tax would be ~₹62,600 (slab tax on ₹12.1L + cess)
- With marginal relief: tax is capped at ₹10,000 (the amount income exceeds ₹12,00,000) + cess = ₹10,400
Marginal relief applies automatically in the IT portal's tax computation engine — but if you are computing manually or reviewing a CA's computation, verify this is correctly applied in the income range ₹12,00,001 to approximately ₹12,75,000.
"Earning ₹1 above ₹12 lakh does not cost you ₹60,000 in tax — marginal relief ensures you only pay tax on the incremental income above the threshold. Understanding this prevents panic over the rebate cliff."
Section 87A Under the Old Regime — Still Relevant?
Under the old regime, Section 87A provides a rebate of up to ₹12,500 for resident individuals with total income up to ₹5,00,000. With the standard deduction of ₹50,000, this effectively means zero tax for salaried taxpayers with gross salary up to ₹5,50,000 under the old regime. However, given the dramatically higher threshold (₹12,00,000) under the new regime, the old regime's Section 87A benefit is primarily relevant only for taxpayers who choose the old regime for other reasons — typically high deduction scenarios — and whose income happens to be below ₹5 lakh.
Who Is NOT Eligible for Section 87A?
- NRIs (Non-Resident Indians): Section 87A is available only to resident individuals. NRIs with Indian income pay tax at slab rates from the first rupee (subject to DTAA provisions) — no rebate available.
- HUFs (Hindu Undivided Families): The rebate is available only to individual taxpayers, not HUFs, firms, or companies.
- Taxpayers with income above ₹12 lakh (new regime): If your total income exceeds ₹12,00,000, you lose the rebate entirely (subject to marginal relief between ₹12L and ~₹12.75L).
- Any taxpayer filing ITR-5, ITR-6, or ITR-7: These forms are for non-individual entities — Section 87A does not apply.
How to Verify Section 87A Is Correctly Applied in Your ITR
When filing your ITR online on the income tax portal, the tax computation is shown in the "Total Tax Liability" section before submission. To verify Section 87A is correctly applied:
- Check that your total income (including all sources) does not exceed ₹12,00,000 under the new regime (or ₹5,00,000 under the old regime)
- In the tax computation page, look for the line "Rebate under Section 87A" — it should show the rebate amount (up to ₹60,000 for new regime)
- If you have capital gains (STCG or LTCG), verify the rebate is applied only against your slab-rate tax, NOT against the capital gains tax — the two computations should be shown separately
- Check that marginal relief is applied if your income is between ₹12,00,001 and approximately ₹12,75,000
- Verify that the total tax after rebate and cess is mathematically consistent before submitting
Section 87A Applied Correctly — Guaranteed
Our CA team in Mumbai reviews the full tax computation including Section 87A, marginal relief, and capital gains separation before filing your ITR — ensuring zero demand notices and accurate refund claims.
Book a Free ConsultationHow a CA in Mumbai Handles Section 87A for Clients
At KC Shah & Associates, every individual ITR filing goes through a final tax computation review that explicitly checks Section 87A application. For clients with capital gains alongside salary income, we compute the slab-rate tax and special-rate tax separately, apply the rebate only to the slab portion, and verify marginal relief where applicable. We have seen numerous cases where clients who filed using online platforms received demand notices for exactly this issue — the platform applied Section 87A against STCG or LTCG, the CPC recomputed without the rebate, and raised a demand. Our outsourced accounting services clients are protected from this by default because the computation is always reviewed by a CA before submission.
Conclusion
Section 87A for AY 2026–27 delivers a genuine and significant tax benefit — zero income tax on total income up to ₹12 lakh under the new regime, and up to ₹5 lakh under the old regime. For salaried employees with gross salary up to ₹12,75,000 and no capital gains or special-rate income, the benefit is complete and straightforward. The complexity arises when capital gains, crypto income, or other special-rate incomes are involved — in those cases, the rebate applies only to the slab-rate portion of tax, and many taxpayers and even tax software products get this wrong. Understanding this distinction before you file ITR online for AY 2026–27 will save you from a demand notice, a refund delay, or an incorrect tax payment. If you have any doubt about how Section 87A applies to your specific income mix, reach out to KC Shah & Associates for a personalised tax computation review.
Written by CA Karan Shah
Founder of KC Shah & Associates. With over 5 years of experience in income tax, GST, and virtual CFO services, Karan helps startups and SMEs across India achieve financial clarity and stay audit-ready.