What the rebate is
Section 87A is a tax rebate, not a deduction. A deduction lowers your taxable income. A rebate is subtracted from the tax you have already calculated, rupee for rupee, up to a ceiling. In the Income-tax Act, 2025, which applies from 1 April 2026, the same provision sits at section 156; for returns on FY 2025-26 you will still see 87A on the forms.
The rebate is available to resident individuals. Companies, firms and non-residents cannot claim it. It cannot exceed the tax you owe, so it takes your tax to zero but never produces a refund by itself.
The two regimes, as of October 2026
| New regime (default) | Old regime | |
|---|---|---|
| Taxable income limit for the rebate | ₹12 lakh | ₹5 lakh |
| Maximum rebate | ₹60,000 | ₹12,500 |
| Standard deduction (salaried) | ₹75,000 | ₹50,000 |
The new regime's ₹12 lakh figure came from Budget 2025. Budget 2026 left the slabs and the rebate unchanged for FY 2026-27. The new-regime slabs are nil up to ₹4 lakh, then 5% to ₹8 lakh, 10% to ₹12 lakh, 15% to ₹16 lakh, 20% to ₹20 lakh, 25% to ₹24 lakh and 30% above that.
Do the maths at the limit: slab tax on ₹12 lakh is ₹20,000 (on the ₹4 to 8 lakh band) plus ₹40,000 (on the ₹8 to 12 lakh band), which is ₹60,000. That is exactly the maximum rebate, so tax is nil. The limit and the cap are designed to meet at that point.
For a salaried person, the ₹75,000 standard deduction comes off first. Gross salary of ₹12.75 lakh gives taxable income of ₹12 lakh, and tax is nil. (Employer-provided perks and other income change this, so compute with your own numbers in the income tax calculator.)
Marginal relief: the cliff that is not a cliff
Without any further rule, a person at ₹12.01 lakh would lose the whole ₹60,000 rebate and pay about ₹60,000 of tax on ₹1,000 of extra income. Marginal relief prevents that. Tax is capped at the amount of income above ₹12 lakh.
| Taxable income | Slab tax before rebate | Tax after rebate and relief |
|---|---|---|
| ₹12,00,000 | ₹60,000 | Nil |
| ₹12,10,000 | ₹61,500 | ₹10,000 |
| ₹12,50,000 | ₹67,500 | ₹50,000 |
| ₹12,70,588 | ₹70,588 | ₹70,588 (relief ends) |
| ₹13,00,000 | ₹75,000 | ₹75,000 |
Cess of 4% is charged on top of the tax in each case. The relief ends around ₹12.71 lakh, because beyond it the slab tax is lower than the income above ₹12 lakh. For a salaried person with the standard deduction, that is roughly ₹13.46 lakh of gross salary.
The practical lesson: income in the band just above ₹12 lakh is taxed at a very high effective rate. A deduction or contribution that pulls taxable income back down to ₹12 lakh, such as an employer NPS contribution (covered in our EPF vs NPS post), can save more than the headline slab suggests.
The catch: capital gains are not covered
From assessment year 2026-27 (FY 2025-26), the Finance Act 2025 restricted the rebate to tax on income taxed at normal slab rates. It does not apply to tax on special-rate income, such as short-term capital gains on listed equity (20%), long-term gains on equity above ₹1.25 lakh (12.5%) and long-term gains under section 112. See our guide to capital gains tax on stocks and property.
An illustration, with assumed numbers. You earn a taxable salary of ₹10 lakh and also book a ₹1 lakh short-term gain on equity funds. Total income is ₹11 lakh, so you are within the limit.
- Slab tax on ₹10 lakh: ₹20,000 + ₹20,000 = ₹40,000. The rebate cancels all of it.
- Tax on the ₹1 lakh gain at 20%: ₹20,000, plus 4% cess, which is ₹20,800. The rebate does not reduce this.
So you owe ₹20,800 even though you look like a "₹11 lakh, zero tax" taxpayer. If you redeem units mid-year, you may also owe advance tax on the gain. Planning when to sell, including using the ₹1.25 lakh annual exemption on long-term equity gains, matters far more for a person at this income. See tax-loss harvesting for one approach.
Which regime, then?
For anyone whose income lies under about ₹12 lakh, the new regime is usually the easier call, because the old regime's rebate stops at ₹5 lakh and its deductions would need to be very large to compete. Above ₹12.7 lakh, the answer depends on the deductions you actually have. Our old vs new regime calculator lets you test both, and the regime guide lays out the trade-offs. The Income Tax Department's portal and the Union Budget site carry the official slab tables.
Three habits help: check the rebate on every projection you make, remember it vanishes for special-rate income, and watch the marginal-relief band when you are deciding whether to take extra income this year.
Quick checks before you rely on the rebate
- Are you resident? Residency depends on days spent in India, not on citizenship. An NRI or a person who was non-resident for the year cannot claim it.
- Which regime did you pick? The ₹12 lakh limit belongs to the new regime. If you opt for the old regime, the limit is ₹5 lakh.
- What is in your total income? The limit is measured on total income, including special-rate capital gains, even though the rebate does not reduce tax on them. If your total crosses ₹12 lakh because of a gain, the rebate on the normal-rate part is lost, subject to marginal relief. Run the case through a calculator rather than guessing.
- Is cess added? The 4% cess applies on tax after the rebate, which is why a taxpayer within marginal relief still pays a few hundred rupees of cess.
This article is for education only and is not tax advice. Slabs, rebates and section numbers change with each Budget; verify current figures on incometax.gov.in or with a qualified professional.
Frequently asked questions
Is income up to ₹12 lakh really tax-free in the new regime?
For a resident individual, taxable income up to ₹12 lakh attracts no tax in the new regime because the section 87A rebate of up to ₹60,000 cancels the slab tax. For a salaried person that works out to gross salary of about ₹12.75 lakh after the ₹75,000 standard deduction. Tax on short-term and long-term capital gains taxed at special rates is not covered by the rebate.
What is marginal relief under section 87A?
If your taxable income is just above ₹12 lakh, marginal relief caps your tax at the amount by which your income exceeds ₹12 lakh, so a few extra rupees of income never cost more than themselves in tax. It fades out at about ₹12.71 lakh of taxable income.
Can an NRI claim the 87A rebate?
No. The rebate is only for individuals who are resident in India. A non-resident pays tax on the slabs without it.
This is commentary on published data, not investment advice. WealthTicker is not a SEBI-registered adviser or distributor. Figures are as of the dates stated and can be revised by their source.
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