Zero Tax up to Rs 12 Lakh: How the Section 87A Rebate of Rs 60,000 Works in the New Regime for FY 2025-26

For the financial year 2025-26 (assessment year 2026-27), a resident individual who stays in the new tax regime pays zero income tax on a total income of up to Rs 12,00,000. The mechanism is not a change in the slabs alone; it is the enlarged rebate under Section 87A of the Income-tax Act 1961, raised to a maximum of Rs 60,000 by the Finance Act 2025. For a salaried taxpayer the effective threshold climbs to Rs 12,75,000 once the Rs 75,000 standard deduction is layered on. This tip walks through the statutory wording, the exact slab-by-slab arithmetic, the marginal-relief trap just above Rs 12 lakh, and the errors that surface in ITR processing. You can cross-check every figure on our income tax calculator.

What the Section Says

Section 87A grants a rebate on the income tax payable, not a deduction from income. Under the new default regime of Section 115BAC(1A), the Finance Act 2025 amended Section 87A so that for AY 2026-27 a resident individual whose total income does not exceed Rs 12,00,000 gets a rebate equal to the amount of income tax payable, capped at Rs 60,000. Because the tax on Rs 12,00,000 under the FY 2025-26 slabs works out to exactly Rs 60,000, the rebate wipes the liability to nil. The Income Tax Department confirms this in its published FAQ on the Section 87A rebate for FY 2025-26, and the underlying statutory text sits in Section 87A of the Income-tax Act 1961 as amended by the Finance Act 2025. The Finance Act 2025 lifted the new-regime rebate ceiling to Rs 12,00,000 of total income and the maximum rebate to Rs 60,000, a substantial widening of the nil-tax band for salaried residents from AY 2026-27.

Three statutory conditions matter. First, the benefit is available only to a resident individual; non-residents, HUFs, firms, and companies cannot claim it. Second, the rebate is computed on the tax before the 4% health and education cess, so the cess never gets added when tax is fully rebated. Third, income taxed at special rates is excluded from the rebate computation: long-term capital gains under Section 112 and 112A and short-term gains under Section 111A do not enjoy the Rs 60,000 rebate on that special-rate portion. If you have equity gains, model them separately on our capital gains calculator.

The old regime figure is unchanged. A resident individual who opts out of Section 115BAC and stays under the old regime gets a Section 87A rebate of up to Rs 12,500 where total income does not exceed Rs 5,00,000. Understanding this difference is the single most valuable output of our old vs new regime comparison.

Worked Example

Take Neha, a resident salaried employee, with a gross salary of Rs 12,75,000 in FY 2025-26 and no other income. Under the new regime she claims the Rs 75,000 standard deduction, bringing total income to exactly Rs 12,00,000. The slab computation runs as follows, using the FY 2025-26 new-regime rates.

Neha's liability is Rs 0. Model the same figures yourself on the new regime calculator and you will see the rebate line zero out the Rs 60,000.

Now change one number. Suppose Neha's total income is Rs 12,10,000, just Rs 10,000 over the ceiling. She loses the full rebate because income exceeds Rs 12,00,000, so we turn to marginal relief. Her gross tax is Rs 60,000 on the first Rs 12,00,000 plus 15% of the Rs 10,000 in the fourth slab, that is Rs 1,500, totalling Rs 61,500. Marginal relief caps the tax at the amount by which income exceeds Rs 12,00,000, which is Rs 10,000. So her tax before cess is limited to Rs 10,000, and the relief itself is Rs 61,500 minus Rs 10,000, or Rs 51,500.

Marginal relief keeps operating until roughly Rs 12,70,588 of total income, the point where the normal slab tax equals the income above Rs 12,00,000. Beyond that, ordinary computation gives the lower figure and relief no longer bites. Our marginal relief calculator plots this band precisely.

Common Mistakes

The first error, seen repeatedly when returns are processed, is treating the Rs 60,000 rebate as available in both regimes. It is not. The enlarged Rs 60,000 rebate and the Rs 12,00,000 ceiling belong only to the new regime under Section 115BAC(1A). A taxpayer under the old regime who claims nil tax on Rs 12,00,000 will receive a demand notice, because the old-regime rebate stops at Rs 5,00,000 and Rs 12,500.

The second mistake is claiming the rebate against capital gains. If your total income of Rs 12,00,000 includes, say, Rs 2,00,000 of short-term equity gains taxed at 20% under Section 111A, the tax on that Rs 2,00,000 is not eligible for the Section 87A rebate. Only the tax on the normally-taxed Rs 10,00,000 can be rebated. Filers who net the two often understate liability and later face a Section 143(1) adjustment. The related concept of tax rebate is frequently confused with a deduction, which reduces income rather than tax.

The third pitfall is forgetting marginal relief entirely and either overpaying on an income of Rs 12,05,000 or, worse, assuming full nil tax just above the line. As shown above, income of Rs 12,10,000 attracts Rs 10,400 including cess, not Rs 0 and not the full Rs 61,500.

A fourth recurring issue is non-residents claiming the rebate. Section 87A is restricted to residents; an NRI with Indian income of Rs 8,00,000 cannot reduce tax to nil through this route. Finally, some salaried filers forget the Rs 75,000 standard deduction and compute the ceiling on gross salary rather than total income, missing the fact that a Rs 12,75,000 salary still lands at nil tax. A related slip is applying the old-regime standard deduction of Rs 50,000 while sitting in the new regime; the correct new-regime figure for FY 2025-26 is Rs 75,000, and using the wrong one can push total income above Rs 12,00,000 and trigger a needless demand of Rs 60,000 plus cess.

FAQ

Is the Section 87A rebate of Rs 60,000 available in the old tax regime?

No. For FY 2025-26 the Rs 60,000 rebate and the Rs 12,00,000 ceiling apply only under the new regime of Section 115BAC(1A). In the old regime the rebate remains Rs 12,500 for total income up to Rs 5,00,000, per the Income-tax Act 1961.

Do I pay tax if my income is exactly Rs 12,00,000?

No. A resident individual under the new regime with total income of exactly Rs 12,00,000 has a gross tax of Rs 60,000, which the Section 87A rebate fully offsets, leaving nil tax and no cess for AY 2026-27.

What happens if my income is Rs 12,50,000?

You lose the full rebate but qualify for marginal relief. Your gross tax is Rs 67,500, but relief limits it to Rs 50,000 (the amount above Rs 12,00,000), so tax plus 4% cess is Rs 52,000. Verify on our marginal relief calculator.

Are capital gains covered by the Rs 60,000 rebate?

No. Income taxed at special rates, such as long-term gains under Section 112A and short-term gains under Section 111A, is excluded from the rebate. Tax on those gains is payable in full even if your total income is under Rs 12,00,000.

Can a non-resident Indian claim the Section 87A rebate?

No. Section 87A is available only to resident individuals. An NRI cannot reduce Indian tax liability to nil under this provision regardless of income level.

Does the standard deduction increase the nil-tax threshold for salaried people?

Yes. The new-regime standard deduction of Rs 75,000 is subtracted first, so a salaried resident with gross salary up to Rs 12,75,000 arrives at total income of Rs 12,00,000 and pays nil tax after the rebate.

How do I claim the rebate in my ITR?

The rebate is computed automatically once you select the new regime and enter your income; the ITR utility applies the Rs 60,000 cap and marginal relief. Confirm the figures against the income tax calculator before filing.