Section 87A Tax Rebate for AY 2026-27: Eligibility, Calculation, and the ₹12 Lakh Rule Explained

If your taxable income is under a certain threshold, you may owe zero income tax — thanks to Section 87A of the Income Tax Act. This rebate is one of the most powerful but misunderstood provisions in Indian tax law, especially after the Union Budget 2025 raised the limit to ₹12 lakh under the new regime.

Here is everything you need to know about claiming the Section 87A rebate for AY 2026-27 (FY 2025-26): who qualifies, how to calculate it, what the marginal relief rule means, and the mistakes that cause taxpayers to miss it.

What Is Section 87A?

Section 87A provides a direct rebate against your income tax liability. Unlike deductions (which reduce taxable income), a rebate reduces your final tax bill directly. If your total income is below the prescribed limit, the government effectively wipes out your entire tax liability.

The rebate applies only to resident individuals. HUFs, firms, NRIs, and companies cannot claim it.

Section 87A Limits for AY 2026-27

The rebate amount and income threshold differ between the two tax regimes:

Under the new regime, if your total income (after the ₹75,000 standard deduction for salaried individuals) does not exceed ₹12,00,000, you get a rebate equal to your entire tax liability — up to ₹60,000. Since the tax on ₹12 lakh under the new slabs is exactly ₹60,000, your net tax becomes zero.

Under the old regime, the threshold remains ₹5,00,000 with a maximum rebate of ₹12,500. This hasn't changed in several years.

How to Calculate the Section 87A Rebate: Step by Step

Let's walk through a practical example under the new regime.

Example 1: Salaried individual earning ₹12.5 lakh gross salary

1. Gross salary: ₹12,50,000
2. Less: Standard deduction: ₹75,000
3. Total income: ₹11,75,000

Tax calculation under new regime slabs:

• ₹0 to ₹4,00,000: Nil
• ₹4,00,001 to ₹8,00,000: 5% = ₹20,000
• ₹8,00,001 to ₹11,75,000: 10% = ₹37,500

Total tax before rebate: ₹57,500

Since total income (₹11,75,000) ≤ ₹12,00,000, Section 87A rebate applies.

Rebate = ₹57,500 (lower of tax payable or ₹60,000)

Net tax payable: ₹0

This means a salaried person earning up to ₹12,75,000 in gross salary pays zero tax under the new regime — the ₹75,000 standard deduction brings their total income to ₹12 lakh, and the rebate eliminates the entire tax.

Example 2: Self-employed individual earning ₹12 lakh (new regime)

1. Total income: ₹12,00,000 (no standard deduction for non-salaried)
2. Tax on ₹12 lakh:
   • ₹0 to ₹4L: Nil
   • ₹4L to ₹8L: 5% = ₹20,000
   • ₹8L to ₹12L: 10% = ₹40,000
   • Total: ₹60,000
3. Rebate under 87A: ₹60,000

Net tax payable: ₹0

Example 3: Old regime with ₹4.8 lakh taxable income

1. Gross income: ₹8,00,000
2. Less: Section 80C (PPF, ELSS): ₹1,50,000
3. Less: Section 80D (health insurance): ₹25,000
4. Less: Standard deduction: ₹50,000
5. Taxable income: ₹4,75,000 (taking other adjustments into account, let's assume ₹4,80,000)

Tax under old slabs:

• ₹0 to ₹2,50,000: Nil
• ₹2,50,001 to ₹4,80,000: 5% = ₹11,500

Since ₹4,80,000 ≤ ₹5,00,000, rebate applies.

Rebate = ₹11,500

Net tax payable: ₹0

Marginal Relief: The Safety Net Above ₹12 Lakh

One of the most important — and least understood — aspects of Section 87A is marginal relief. Without it, earning even ₹1 more than ₹12 lakh would create an absurd tax jump.

Here is the problem: if your total income is ₹12,01,000 under the new regime, you lose the entire ₹60,000 rebate. Your tax liability would jump from ₹0 to ₹60,150. You would pay ₹60,150 in tax on just ₹1,000 of additional income. That makes no sense.

Marginal relief fixes this. The rule is straightforward: your tax liability cannot exceed the amount by which your income exceeds ₹12,00,000.

Example: Income of ₹12,10,000 under new regime

1. Tax on ₹12,10,000:

   • ₹0 to ₹4L: Nil
   • ₹4L to ₹8L: ₹20,000
   • ₹8L to ₹12L: ₹40,000
   • ₹12L to ₹12.1L: 15% × ₹10,000 = ₹1,500
   • Total: ₹61,500

2. No 87A rebate (income exceeds ₹12L)

3. Marginal relief check: Income exceeds ₹12L by ₹10,000. Tax of ₹61,500 exceeds the surplus of ₹10,000.

4. Tax after marginal relief: ₹10,000 (not ₹61,500)

This protection ensures a smooth tax transition rather than a cliff. The marginal relief zone runs roughly from ₹12,00,001 to approximately ₹12,75,000 under the new regime — beyond that, the regular tax calculation produces a lower amount than the marginal relief formula.

Income Types That Don't Qualify for Section 87A

This is where many taxpayers make costly mistakes. Section 87A rebate does not apply to income taxed at special rates:

• Short-term capital gains under Section 111A (equity shares, equity mutual funds) — taxed at 20%
• Long-term capital gains under Section 112A (equity) — taxed at 12.5% above ₹1.25 lakh
• Long-term capital gains under Section 112 (debt funds, property, gold) — taxed at 12.5%

Example: The capital gains trap

Rajesh has a salary income of ₹10 lakh and LTCG of ₹2 lakh from selling equity mutual funds. His total income is ₹12 lakh, so he expects Section 87A to make his tax zero.

But here's the catch: the rebate applies only to the tax on his normal income (₹10 lakh), not on the LTCG portion. The LTCG above the ₹1.25 lakh exemption is taxed at 12.5% regardless of the rebate.

His tax:

• Tax on salary income (₹10 lakh): ₹40,000 → rebate of ₹40,000 under 87A (assuming total income within threshold for normal income)
• LTCG tax: 12.5% on ₹75,000 (₹2L minus ₹1.25L exemption) = ₹9,375

Net tax: ₹9,375, not zero.

If you have capital gains, ensure you understand how they interact with the rebate. 49Tax's AI engine automatically separates your income types and calculates the correct rebate.

Common Mistakes to Avoid

1. Confusing gross income with total income

The ₹12 lakh threshold applies to total income (after standard deduction and other allowed deductions), not your gross salary. A salaried individual earning ₹12.75 lakh gross still qualifies because the ₹75,000 standard deduction brings total income to ₹12 lakh.

2. Forgetting that NRIs don't qualify

Section 87A is exclusively for resident individuals. If you are a Non-Resident Indian (NRI) or Resident but Not Ordinarily Resident (RNOR), you cannot claim this rebate regardless of your income level. Check our NRI filing guide for your specific tax obligations.

3. Not claiming the rebate on the ITR form

The rebate is not automatic in all cases. When filing your ITR, ensure you fill in the Section 87A field correctly. Many taxpayers skip this and end up paying tax they don't owe.

4. Assuming the rebate covers surcharge and cess

Section 87A rebate is applied before health and education cess. However, since the rebate typically zeroes out the tax, the 4% cess on zero is also zero. This only matters in edge cases where the rebate partially reduces tax.

5. Ignoring marginal relief

If your income is slightly above ₹12 lakh, don't just accept the full tax computation. Verify that marginal relief has been correctly applied. Many manual calculations miss this, resulting in an overpayment.

Section 87A vs Other Common Deductions

The key difference: deductions reduce your taxable income, which indirectly reduces tax. The 87A rebate directly eliminates tax. For someone at the threshold, Section 87A is worth more than any single deduction.

Practical Tax Planning Around the ₹12 Lakh Threshold

If your income hovers near ₹12 lakh, strategic planning can save you significant tax:

Scenario: Income of ₹12.5 lakh under the new regime

Without planning: Tax of approximately ₹12,500 (after marginal relief, since surplus is ₹50,000)

With employer-assisted planning:

• If your employer increases NPS contribution under Section 80CCD(2) by ₹50,000, your taxable income drops to ₹12 lakh
• Full 87A rebate applies
• Tax saved: ₹12,500

The employer NPS contribution is one of the few deductions available under the new regime. For incomes marginally above ₹12 lakh, this single adjustment can bring your tax to zero.

How 49Tax Handles Section 87A

When you file through 49Tax, the platform automatically:

• Determines your residential status and 87A eligibility
• Separates normal income from special-rate income (capital gains)
• Applies the rebate correctly
• Calculates marginal relief if your income is slightly above the threshold
• Compares your tax under both regimes to recommend the better option

You don't need to manually check any of this — the regime comparison tool runs both scenarios and shows you the exact difference.

Key Takeaway

Section 87A makes income up to ₹12 lakh completely tax-free under the new regime for AY 2026-27 — and up to ₹12.75 lakh for salaried individuals after the standard deduction. If your income is near this threshold, check whether employer NPS contributions or other new-regime-compatible adjustments can bring you below the line. And if you have capital gains, remember that the rebate does not cover income taxed at special rates — factor that into your filing to avoid surprises.