Section 87A rebate FY 2025-26: how the new regime makes income up to Rs 12 lakh tax-free

For the financial year 2025-26 (assessment year 2026-27), the single most consequential change for salaried taxpayers is the rebate under Section 87A of the Income-tax Act, 1961. Under the new tax regime governed by Section 115BAC(1A), the maximum rebate has been raised to Rs 60,000, more than doubling the relief available in FY 2024-25. The practical effect is that a resident individual with a total income up to Rs 12,00,000 pays nil tax, and a salaried person earning up to Rs 12,75,000 of gross salary pays nothing once the Rs 75,000 standard deduction is applied. This guide explains exactly how that works, with a fully worked computation and the scrutiny pitfalls the Income Tax Department flags most often.

What the Section Says

Section 87A grants a rebate from the tax payable to a resident individual whose total income does not exceed a stated threshold. The rebate is deducted from the tax computed on slab income before the 4% health and education cess is added. It is a rebate on tax, not a deduction from income, which is why it can wipe out the entire liability rather than merely reducing taxable income.

For FY 2025-26, the two regimes carry very different numbers. Under the new regime u/s 115BAC(1A), the rebate is the lower of the tax payable or Rs 60,000, available where total income does not exceed Rs 12,00,000. Under the old regime, the rebate remains the lower of the tax payable or Rs 12,500, available where total income does not exceed Rs 5,00,000. The Income Tax Department FAQ for FY 2025-26 confirms these figures explicitly.

Eligibility is restricted. Per Section 87A read with the Income Tax Department guidance, only a resident individual qualifies. Non-resident individuals (NRIs), Hindu Undivided Families (HUFs), firms and companies cannot claim the tax rebate at all. A resident senior citizen aged 62 with a pension income of Rs 11,80,000 in FY 2025-26 qualifies; an NRI with the same income does not and pays tax per the slabs.

The new regime slabs that feed this computation, as notified under Section 115BAC(1A) for FY 2025-26, are set out below.

A crucial nuance from the Income Tax Department FAQ: the Rs 60,000 rebate applies only to income taxed at the normal slab rates. Income chargeable at special rates, such as long-term capital gains under Section 112A or short-term capital gains under Section 111A, is excluded from the rebate. You can compare both regimes side by side using the Oquilia old vs new regime calculator before you file.

Worked Example

Consider Priya, a resident salaried employee, with a gross salary of Rs 12,75,000 for FY 2025-26 and no other income. She opts for the default new regime.

After the standard deduction of Rs 75,000 available to salaried taxpayers under the new regime, her total income is Rs 12,00,000. Her slab tax is computed as follows.

Priya's slab tax of Rs 60,000 is exactly cancelled by the Rs 60,000 rebate, so her cess is nil and her total tax payable is Rs 0. Run the same figures through the Oquilia new regime income tax calculator and you will see the liability collapse to zero at this income.

Now consider what happens just above the threshold, where marginal relief becomes essential. Suppose Rahul, a resident, has a total income of Rs 12,10,000 in FY 2025-26. Because his income exceeds Rs 12,00,000, he gets no Section 87A rebate. His raw slab tax is Rs 20,000 plus Rs 40,000 plus 15% of Rs 10,000, which equals Rs 61,500. Without relief, earning Rs 10,000 more than Priya would cost him Rs 61,500 in tax, an absurd outcome.

Section 115BAC(1A) read with the marginal relief provision fixes this. The rule, confirmed in the Income Tax Department FAQ for FY 2025-26, is that the tax payable cannot exceed the amount by which total income exceeds Rs 12,00,000. Rahul's income exceeds the threshold by Rs 10,000, so his tax is capped at Rs 10,000. The marginal relief is Rs 61,500 minus Rs 10,000, that is Rs 51,500. Adding 4% cess of Rs 400, Rahul pays Rs 10,400 in total. Marginal relief tapers off and stops being beneficial at a total income of approximately Rs 12,70,588, beyond which the normal slab tax is lower than the income-excess cap. For a detailed liability across regimes, the Oquilia income tax calculator applies these caps automatically.

Common Mistakes

Errors around Section 87A surface repeatedly in ITR processing and scrutiny. The following are the ones the Income Tax Department most frequently flags for FY 2025-26.

Claiming the Rs 60,000 rebate under the old regime. The enhanced Rs 60,000 rebate exists only in the new regime u/s 115BAC(1A). If you opt for the old regime, your rebate is capped at Rs 12,500 and your income threshold drops to Rs 5,00,000. Taxpayers who file under the old regime to claim deductions such as Section 80C sometimes wrongly expect the Rs 60,000 figure, and the return is corrected at processing.

Setting the rebate against capital gains tax. A taxpayer with Rs 11,00,000 salary and Rs 1,50,000 of long-term capital gains under Section 112A cannot use the Rs 60,000 rebate against the 12.5% LTCG tax. The rebate applies only to tax on normal-rate income. The LTCG above the Rs 1.25 lakh annual exemption remains taxable at 12.5%.

Assuming NRIs and HUFs qualify. Section 87A is restricted to resident individuals. An NRI with Indian income of Rs 9,00,000 pays slab tax with no rebate, even though a resident with identical income would pay nil.

Confusing the rebate threshold with the zero-tax salary figure. The Rs 12,00,000 figure is a total income threshold. A salaried person reaches zero tax at a gross salary of Rs 12,75,000 only because of the Rs 75,000 standard deduction. Treating Rs 12,75,000 as the rebate threshold for a pensioner without salary income overstates the relief.

Forgetting marginal relief just above Rs 12,00,000. Taxpayers with income between Rs 12,00,001 and roughly Rs 12,70,588 who compute raw slab tax without the income-excess cap overpay. The cap limits tax to the excess over Rs 12,00,000.

FAQ

What is the maximum Section 87A rebate for FY 2025-26?

Under the new regime u/s 115BAC(1A), the maximum rebate is Rs 60,000 where total income does not exceed Rs 12,00,000. Under the old regime, it stays at Rs 12,500 where total income does not exceed Rs 5,00,000, per the Income Tax Department FAQ for FY 2025-26.

Does a salary of Rs 12,75,000 really attract zero tax?

Yes, for a resident salaried individual under the new regime. The Rs 75,000 standard deduction reduces gross salary of Rs 12,75,000 to a total income of Rs 12,00,000, on which the Rs 60,000 slab tax is fully offset by the Rs 60,000 rebate, giving nil tax.

Can NRIs claim the Section 87A rebate?

No. Section 87A is available only to resident individuals. NRIs, HUFs, firms and companies are excluded and pay tax per the applicable slabs without any rebate.

Is the rebate available against capital gains?

No. The rebate applies only to tax on income taxed at normal slab rates. Tax on long-term capital gains u/s 112A and short-term capital gains u/s 111A is excluded, so the Rs 60,000 rebate cannot reduce the 12.5% LTCG liability.

What is marginal relief and when does it apply?

Marginal relief ensures that for income just above Rs 12,00,000 in the new regime, the tax payable does not exceed the amount by which income crosses Rs 12,00,000. It applies up to a total income of approximately Rs 12,70,588 for FY 2025-26.

How do I choose between the old and new regime?

Compare your tax under both after accounting for deductions. If your eligible deductions are modest, the new regime with its Rs 60,000 rebate and Rs 75,000 standard deduction usually wins. The Oquilia old vs new regime calculator computes both for your figures.

Which form and year do I file for this rebate?

The rebate is claimed in the ITR for assessment year 2026-27, covering income earned in financial year 2025-26 (1 April 2025 to 31 March 2026). The rebate is auto-applied in the tax computation when you select the new regime.