Section 87A rebate under the new regime: up to Rs 60,000 makes income up to Rs 12 lakh tax-free

For assessment year 2026-27 (financial year 2025-26), a resident individual in the new tax regime pays no income tax on normal income if total income is Rs 12,00,000 or less. The mechanism is the Section 87A tax rebate, worth up to Rs 60,000, set out in the Income Tax Department's AY 2026-27 guidance for salaried individuals, last reviewed on 9 July 2026. With the Rs 75,000 standard deduction, a salaried taxpayer reaches the nil-tax point at a gross salary of Rs 12,75,000.

Three conditions catch people out: the Rs 12 lakh test applies to taxable income, not gross pay; the rebate never reaches tax on special-rate income such as capital gains; and the old regime's version is only Rs 12,500, on income up to Rs 5,00,000.

What the Section Says

Section 87A of the Income-tax Act, 1961 lets an individual resident in India deduct a rebate from the income tax computed on total income; the 4% health and education cess is then charged on whatever tax remains. The ITD page describes the rebate as up to 100% of income tax, capped according to the regime:

According to the Finance Ministry's Memorandum Explaining the Provisions in the Finance Bill, 2025, the Finance Act 2023 added a proviso to Section 87A for income taxed under sub-section (1A) of Section 115BAC, with a Rs 7,00,000 threshold and marginal relief above it. From AY 2026-27, the Finance Act 2025 raised the threshold to Rs 12,00,000 and the cap to Rs 60,000.

The two numbers are built to meet. On the ITD's new-regime slabs, the first Rs 4,00,000 is taxed at nil, the next Rs 4,00,000 at 5% (Rs 20,000) and the band up to Rs 12,00,000 at 10% (Rs 40,000), so tax on exactly Rs 12,00,000 is Rs 60,000, equal to the cap. The Budget speech of 1 February 2025 put the saving at that income at Rs 80,000 against the slab rates it replaced.

Marginal relief above Rs 12 lakh

The rebate does not switch off at Rs 12,00,001. Clause (b) of the proviso, reproduced in the ITD's FAQs on the new and old tax regimes, gives relief equal to the amount by which tax on total income exceeds the income earned above the threshold. The FAQ still quotes the earlier Rs 7,00,000 figure; the annexure to the Budget 2025-26 speech confirms the relief now applies just above Rs 12,00,000. In effect, tax before cess cannot exceed what you earn above Rs 12 lakh.

The old regime has no equivalent: the memorandum places marginal relief inside the proviso for new-regime income, and the ITD table sets a flat Rs 5,00,000 condition for the Rs 12,500 rebate.

Special-rate income and who is excluded

The memorandum states that the rebate is not available on tax on income chargeable at special rates, naming capital gains under Sections 111A and 112, and it describes a new proviso capping the rebate at the tax computed at new-regime slab rates. The Budget speech said the same: the Rs 12 lakh promise covers normal income, not capital gains.

Because the section speaks of an individual resident in India, non-residents and Hindu Undivided Families get no rebate, even though the ITD's AY 2026-27 slabs apply to resident and non-resident individuals alike.

Few deductions survive in the new regime to pull total income under the line. The ITD FAQ allows only Sections 80CCD(2), 80CCH and 80JJAA from Chapter VI-A, and the AY 2026-27 page caps the employer's NPS contribution under Section 80CCD(2) at 14% of salary. Section 80C and Section 80D do not apply.

Worked Example

Take a resident employee aged 35 whose only income is salary, filing for AY 2026-27 under the default new regime:

At Rs 12,75,000, the rebate cancels the full Rs 60,000 and no cess follows. At Rs 13,10,000, total income is Rs 35,000 above the line, so marginal relief caps tax at Rs 35,000; with Rs 1,400 of cess, the bill is Rs 36,400 instead of Rs 67,860 without relief.

Relief lasts only while slab tax exceeds the income above Rs 12 lakh. Solving Rs 60,000 plus 15% of the excess against the excess gives a crossover near Rs 70,588, so relief ends at a total income of about Rs 12,70,588, or a salary of about Rs 13,45,588:

At Rs 12,10,000, tax after relief equals the Rs 10,000 earned above the line, but the memorandum says no marginal relief is available on cess, so the all-in bill of Rs 10,400 slightly exceeds the extra income. Test your own figures in the new regime income tax calculator.

The same salary under the old regime

Assume the Rs 12,75,000 earner claims a full Rs 1,50,000 under Section 80C and nothing else. After the Rs 50,000 standard deduction, total income is Rs 10,75,000 and old-regime tax is Rs 1,12,500 plus 30% of Rs 75,000, or Rs 1,35,000. No rebate applies above Rs 5,00,000, so the bill with cess is Rs 1,40,400 against nil in the new regime; the old vs new regime calculator runs this with your own deductions.

The old regime's edge is also a cliff: at Rs 5,00,000 of total income, tax of Rs 12,500 is fully rebated, but at Rs 5,10,000 the bill is Rs 14,500 plus Rs 580 of cess, or Rs 15,080.

When capital gains are in the mix

Suppose total income of Rs 11,00,000 comprises Rs 10,00,000 of salary after the standard deduction and Rs 1,00,000 of short-term capital gains on STT-paid equity, taxed at 20% under Section 111A. The rebate wipes out the Rs 40,000 slab tax on the salary, but the Rs 20,000 tax on the gain stays, so the bill with cess is Rs 20,800. The ITD page rules out ITR-1 for anyone with short-term capital gains, so this return goes on ITR-2; the capital gains calculator keeps the two streams apart.

Common Mistakes

Seven errors to check before filing or revising an AY 2026-27 return:

1. Testing gross salary instead of total income. The ITD condition is taxable income of Rs 12,00,000 or less; a Rs 13,10,000 salary leaves Rs 12,35,000 and costs Rs 36,400.
2. Treating Rs 60,000 as a flat credit. The rebate is capped at the tax itself, so at Rs 9,00,000 of total income it is only Rs 30,000, and the unused balance cannot be set against anything else.
3. Expecting the rebate to cover capital gains tax. The memorandum keeps tax on special-rate income, such as Section 111A gains, outside the rebate, which is why the example above pays Rs 20,800.
4. Claiming old-regime deductions in the new regime. The ITD FAQ bars Chapter VI-A deductions other than Sections 80CCD(2), 80CCH and 80JJAA, the HRA exemption under Section 10(13A) and interest on a self-occupied home loan, so none of them can pull income below Rs 12 lakh.
5. Assuming your employer declaration fixes the regime. The FAQ states that telling the employer does not exercise the option under sub-section (6) of Section 115BAC; that choice is made in the return by the Section 139(1) due date.
6. Expecting to switch regimes in a late return. Per the same FAQ, the old regime can be chosen only in a return filed by the Section 139(1) due date; a later return stays in the new regime, with its Rs 60,000 rebate.
7. Claiming it as a non-resident or HUF. The ITD page and the memorandum confine the rebate to resident individuals, so a non-resident with Rs 12,00,000 of taxable income pays Rs 60,000 plus Rs 2,400 of cess.

If the processing centre later proposes a change, see our guide to responding to a prima facie adjustment under Section 143(1)(a), and our explainer on new tax regime slabs for AY 2026-27 for the full ladder to 30%.

FAQ

Is income up to Rs 12 lakh fully tax-free under the new regime?

Yes for normal income, if you are a resident individual with total income of Rs 12,00,000 or less for AY 2026-27; salaried taxpayers reach that point at a gross salary of Rs 12,75,000. Tax on special-rate income, such as capital gains under Section 111A, is not covered.

How much tax is due on taxable income of Rs 12,10,000?

Marginal relief limits tax to the Rs 10,000 earned above Rs 12,00,000, and 4% cess adds Rs 400, for a total of Rs 10,400 instead of slab tax of Rs 61,500. Relief continues until total income reaches about Rs 12,70,588.

Can an NRI claim the Section 87A rebate?

No. The rebate is limited to individuals resident in India, though the ITD's new-regime slabs apply to non-residents too, so a non-resident with Rs 12,00,000 of taxable income owes Rs 62,400 including cess. Check your residential status first.

Does the rebate reduce tax on short-term capital gains from shares?

No. The memorandum on the Finance Bill, 2025 says the rebate is not available on tax on special-rate income, citing Sections 111A and 112. On Rs 1,00,000 of Section 111A gains, Rs 20,000 plus Rs 800 of cess stays payable.

Can I switch to the old regime in a late return for AY 2026-27?

No. The ITD FAQ lets a taxpayer without business income choose the regime every year, but only in a return filed on or before the Section 139(1) due date. A later return is computed under the default new regime, which carries the larger Rs 60,000 rebate.

Do senior citizens get a bigger rebate?

No. The ITD's AY 2026-27 tables use the same new-regime slabs at every age, so the Rs 12,00,000 ceiling and Rs 60,000 cap apply at 60 or 80. The old regime gives seniors a higher basic exemption, Rs 3,00,000 from 60 to 79 and Rs 5,00,000 from 80, but its rebate stays at Rs 12,500.

Do I need to tell my employer which regime I want?

Yes. Per the ITD FAQ, an employee who makes no intimation is presumed to be in the default new regime, and the employer deducts tax at Section 115BAC rates. The intimation does not exercise the option, which is still made in the return by the Section 139(1) due date.