Section 87A Marginal Relief: How Taxpayers at Rs 12-12.75 Lakh Pay Almost Zero Tax (FY 2025-26)

For salaried Indians earning between Rs 12 lakh and Rs 13 lakh, the Finance Act 2025 has rewritten the tax script. Under the revised new regime that took effect on 1 April 2025, taxable income of exactly Rs 12,00,000 attracts zero tax thanks to an enhanced Section 87A rebate of up to Rs 60,000. But if your income spills over by even Rs 10,000, the slab tax shoots to Rs 61,500 — until marginal relief steps in to cap the bill. This morning's tip walks through the arithmetic so you do not over-pay through April salary TDS.

The Rs 12 lakh threshold matters because it sits inside the 15% slab band running from Rs 12 lakh to Rs 16 lakh. Without marginal relief, a taxpayer earning Rs 12,10,000 would face a tax bill more than six times their incremental income — the cliff edge the Finance Minister explicitly closed in para 50 of the Budget speech delivered on 1 February 2025. The proviso added to Section 87A by Finance Act 2025 ensures the tax payable on income just above Rs 12 lakh never exceeds the income earned above Rs 12 lakh.

What the Section Says

Section 87A of the Income-tax Act 1961 grants resident individuals a rebate against tax payable — it is a credit against tax, not a deduction from income. Finance Act 2025 enlarged the rebate available under the new regime in Section 115BAC and added a marginal relief proviso. Applicable to AY 2026-27 (FY 2025-26):

Two anchors fix the upper bound. First, the new-regime slab schedule for FY 2025-26 notified by Finance Act 2025: nil up to Rs 4,00,000, 5% on Rs 4,00,001 to Rs 8,00,000, 10% on Rs 8,00,001 to Rs 12,00,000, 15% on Rs 12,00,001 to Rs 16,00,000, 20% on Rs 16,00,001 to Rs 20,00,000, 25% on Rs 20,00,001 to Rs 24,00,000 and 30% above Rs 24,00,000. Second, the standard deduction of Rs 75,000 available to salaried taxpayers under the Income-tax Act read with Section 115BAC. A salaried professional drawing a gross of Rs 12,75,000 ends up with taxable income of exactly Rs 12,00,000 after standard deduction — and therefore zero tax.

The rebate is not a free pass on every type of income. Section 112A long-term capital gains on listed equity (taxed at 12.5% above the Rs 1,25,000 exemption from 23 July 2024) and Section 111A short-term capital gains on equity (taxed at 20% from the same date) are stripped out of total income before the Section 87A rebate is computed. A salaried taxpayer who books equity LTCG of Rs 30,000 on 30 March 2026 cannot use up the Rs 60,000 rebate against that gain — the rebate covers tax only on residual slab income.

For context, the previous year's rules under Finance Act 2024 set a much smaller rebate at a far lower threshold under the new regime. A taxpayer at Rs 12,00,000 paid roughly Rs 80,000 of slab tax for AY 2025-26 — so the effective shift between AY 2025-26 and AY 2026-27 is close to a Rs 80,000 saving for a salaried filer at the threshold.

Worked Example

Consider four taxpayers, each filing under the new regime for AY 2026-27. None claims any deduction except the Rs 75,000 standard deduction. "Tax + Cess Payable" includes Health and Education Cess at 4%.

Pull row 2 apart. The slab tax of Rs 61,500 is calculated as Rs 0 (on Rs 0 to Rs 4,00,000) + Rs 20,000 (5% on Rs 4,00,000) + Rs 40,000 (10% on Rs 4,00,000) + Rs 1,500 (15% on Rs 10,000). Section 87A rebate is unavailable because taxable income of Rs 12,10,000 exceeds the Rs 12,00,000 threshold. Marginal relief then engages: tax payable cannot exceed (Rs 12,10,000 minus Rs 12,00,000) = Rs 10,000. The taxpayer pays Rs 10,000 plus 4% cess of Rs 400, total Rs 10,400.

Now read row 4. Slab tax of Rs 71,250 is below the marginal relief cap of Rs 75,000, so the cap is non-binding and the taxpayer pays slab tax in full plus 4% cess of Rs 2,850. The break-even point — where marginal relief stops helping — is Rs 12,70,588, found by solving 60,000 + 0.15 × (X minus 12,00,000) = X minus 12,00,000. Above that figure, slab tax is naturally lower than (income minus Rs 12 lakh), so marginal relief simply does not bite. Plug your own salary into the Oquilia income tax calculator or the regime comparison tool at old vs new to confirm.

Common Mistakes

Stacking the rebate on top of capital gains. Salary income of Rs 11,80,000 plus equity LTCG of Rs 30,000 may look like total income of Rs 12,10,000, but the Rs 30,000 LTCG is taxed at the special 12.5% rate (after the Rs 1,25,000 Section 112A exemption — so in this case nil). The salary portion of Rs 11,80,000 minus Rs 75,000 standard deduction equals Rs 11,05,000, on which the full rebate applies; the LTCG sits outside. Mixing them and assuming a single Rs 60,000 credit covers everything is the most common error in Centralised Processing Centre intimations on partial reprocessing.

Choosing the old regime by default. Section 115BAC makes the new regime the default for AY 2026-27. Salaried taxpayers without business income who want the old regime must tick the option in Form ITR-1 or ITR-2 by the original return due date — usually 31 July 2026. Taxpayers with business income must file Form 10-IEA before that due date. Missing the deadline forfeits the right to opt out for the year; the new regime then applies along with its Rs 60,000 rebate but without old-regime deductions like Section 80C or Section 80D.

Forgetting cess in TDS planning. Section 87A reduces the basic tax to zero up to Rs 12 lakh, so the 4% Health and Education Cess on it is also nil. But the moment marginal relief takes over, cess applies on the relieved tax figure — a Rs 50,000 cap becomes Rs 52,000 after cess. Form 16 issued by the employer for FY 2025-26 should reflect this; if it does not, ask payroll to rebuild the TDS schedule before March 2026 closure rather than waiting for an ITR refund. Use our income tax (new regime) calculator to verify.

Surcharge confusion above Rs 50 lakh. Marginal relief under Section 87A is distinct from the long-standing marginal relief on surcharge. A taxpayer at Rs 50,10,000 may benefit from surcharge marginal relief, but cannot claim Section 87A because income exceeds Rs 12 lakh by a wide margin. The new regime caps the highest surcharge at 25% above Rs 5 crore.

Treating the rebate as a deduction on the return. It is a credit against tax, not a reduction of taxable income. Gross total income on your ITR will still show Rs 12,00,000; only the "Tax payable" row will read zero. See our walk-through on ITR scrutiny notices for the documentation corollary, and the Oquilia glossary entry on tax rebate for the credit-versus-deduction distinction.

FAQ

Does Section 87A marginal relief apply automatically when I file ITR online?

Yes. The Income Tax Department's e-filing utility for AY 2026-27 — released through the income tax portal — calculates marginal relief automatically once you enter taxable income above Rs 12,00,000. You do not need to check a separate box. If your computation shows tax demand higher than (income minus Rs 12,00,000), refresh the JSON utility before submission and verify the version number.

Can NRIs claim the Section 87A rebate of Rs 60,000?

No. Section 87A applies only to a "resident individual" within the meaning of Section 6 of the Income-tax Act 1961. Non-residents and Resident-but-Not-Ordinarily-Resident (RNOR) taxpayers are excluded. An NRI with Indian taxable income of Rs 12,00,000 under the new regime will still pay the full slab tax of Rs 60,000 plus 4% cess of Rs 2,400, total Rs 62,400.

Is marginal relief available in the old tax regime?

No. The old regime retains the Section 87A rebate of up to Rs 12,500 for taxable income up to Rs 5,00,000, but Finance Act 2025 did not add a marginal relief proviso for the old regime. A taxpayer at Rs 5,01,000 in the old regime pays the full slab tax of Rs 12,700 (5% on Rs 2,51,000 above the Rs 2,50,000 basic exemption) plus 4% cess.

Do I lose the rebate if I have business income above Rs 12 lakh?

The rebate is computed on total income, not source. A self-employed consultant with net professional income of Rs 11,90,000 after presumptive computation gets the full Rs 60,000 rebate; one at Rs 12,40,000 gets marginal relief capping tax at Rs 40,000 plus 4% cess of Rs 1,600. Business filers who opt out of the new regime via Form 10-IEA cannot return to it for the same year.

How does the Rs 60,000 rebate interact with the additional NPS deduction of Rs 50,000?

The additional Rs 50,000 NPS deduction under Section 80CCD(1B) is NOT allowed in the new regime — it is available only under the old regime. A taxpayer who claims Section 80CCD(1B) cannot also claim the new regime Rs 60,000 rebate; the two are mutually exclusive because Section 80CCD(1B) is unavailable in the new regime by design. Run the Oquilia TDS calculator at your salary level before fixing your investment declaration with payroll.

Can senior citizens claim a higher Section 87A rebate?

No. Section 87A is age-agnostic in both regimes. A senior citizen aged 67 earning Rs 12,00,000 under the new regime gets exactly the same Rs 60,000 rebate as a 30-year-old. The old regime continues to offer higher basic exemption (Rs 3,00,000 for senior citizens aged 60-79 and Rs 5,00,000 for super seniors aged 80 and above) but does not lift the 87A threshold above Rs 5,00,000.

Does the rebate apply to short-term capital gains on equity under Section 111A?

The Section 87A rebate does not cover tax on Section 111A short-term capital gains (taxed at 20% from 23 July 2024) or Section 112A long-term capital gains (taxed at 12.5% above the Rs 1,25,000 annual exemption). The capital gains amount is removed from total income before the rebate is computed. Practitioners commonly miss this in clients with active trading accounts, leading to short payments flagged in CPC processing.