Section 87A rebate: Old regime Rs 5 lakh vs new regime Rs 12 lakh thresholds for FY 2025-26

A reader earning Rs 11.8 lakh a year wrote to us in May 2026 in a mild panic: a colleague told her she would owe "almost nothing" under the new regime for FY 2025-26, while her old accountant insisted she crossed the Rs 5 lakh rebate ceiling years ago and must pay full tax. Both were describing Section 87A of the Income-tax Act, 1961, and both were partly right. The confusion is entirely about which regime sets which threshold, and the gap between the two is enormous: Rs 5 lakh in the old regime versus Rs 12 lakh in the new regime for AY 2026-27. This article resolves that question with the exact rebate quantum, the slab arithmetic, and the one trap that quietly defeats the rebate even when your income looks safely under Rs 12 lakh.

The Scenario

Picture three resident individuals filing for AY 2026-27. Priya draws a salary of Rs 12.75 lakh and has heard the new regime makes her income "tax-free". Rohan earns Rs 4.9 lakh and uses the old regime to claim his Section 80C investments. Meera earns Rs 11 lakh in salary plus Rs 1 lakh of short-term capital gains on equity, and assumes her total Rs 12 lakh stays under the rebate ceiling. All three are relying on Section 87A, but the rebate behaves differently for each because the threshold, the maximum rebate amount, and the type of income each one earns are not the same.

The stakes are concrete. Getting the regime choice wrong can cost a salaried individual the full Rs 60,000 rebate now available in the new regime, or leave an old-regime filer paying tax on income that a Rs 12,500 rebate would have wiped clean. Before guessing, it is worth running both regimes side by side on our old vs new regime calculator and the income tax calculator, because the right answer changes the moment your deductions or your income mix shifts.

Statutory Answer

Section 87A of the Income-tax Act, 1961 grants a rebate to a "resident individual" whose total income does not exceed a specified limit. The provision was amended by the Finance Act 2025 to raise the new-regime ceiling sharply for FY 2025-26. The rebate is a direct reduction of tax payable, not a deduction from income, which is why it can take a liability to exactly zero. The two regimes now sit far apart, as set out below.

Two statutory points decide every borderline case. First, the rebate is available only to a resident individual; a non-resident (NRI) cannot claim Section 87A in either regime, a position the Income Tax Department restates in its return utilities. Anyone unsure of their status should confirm it against the day-count rules summarised in our residential status glossary entry before filing. Second, the Finance Act 2025 confirmed the long-standing CBDT position that the rebate does not apply to tax on incomes charged at special rates: short-term capital gains on equity under Section 111A, long-term capital gains under Section 112, and long-term capital gains on equity under Section 112A are all excluded. The bare text of Section 87A is reproduced on the India Code portal maintained by the Government of India.

The "total income" that is tested against the Rs 12 lakh or Rs 5 lakh ceiling is the figure after all eligible deductions, the same total income concept used throughout the Act. For a salaried person in the new regime, the standard deduction of Rs 75,000 is subtracted first, so gross salary up to Rs 12.75 lakh can still land at a Rs 12 lakh taxable income. In the old regime the standard deduction is Rs 50,000.

Worked Resolution

Take Priya first, the salaried filer in the new regime. Her gross salary is Rs 12,75,000 and the standard deduction of Rs 75,000 brings her total income to Rs 12,00,000 for FY 2025-26. The new-regime slabs tax this as follows.

Priya's gross tax of Rs 60,000 is exactly offset by the Rs 60,000 rebate, so her liability is nil and no 4% cess applies on zero tax. This is the arithmetic behind the headline that Rs 12 lakh is "tax-free" in the new regime, and it holds only because she is a resident and her income is entirely salary taxed at slab rates. You can reproduce this on the new regime calculator.

Rohan, earning Rs 4,90,000 and filing under the old regime, sits below the Rs 5,00,000 ceiling. His old-regime tax is Rs 12,000 (5% on the slice between Rs 2,50,000 and Rs 4,90,000), which the Rs 12,500 rebate fully erases, leaving zero. Had he earned Rs 5,10,000, he would breach the ceiling, lose the entire rebate, and pay tax from the Rs 2,50,000 mark upward, an abrupt jump that makes the old-regime rebate a genuine cliff rather than a gentle taper.

Meera is the cautionary case. Her Rs 11,00,000 salary plus Rs 1,00,000 of short-term equity gains totals Rs 12,00,000, which looks safe. But the Rs 1,00,000 STCG is taxed under Section 111A at 20% (Budget 2024 rate), and Section 87A cannot rebate that special-rate tax. Her slab tax on the Rs 11,00,000 salary portion is Rs 50,000, which the rebate does erase because her total income is within Rs 12 lakh; however the Rs 20,000 STCG tax stands, plus 4% cess of Rs 800, giving a net liability of Rs 20,800. The lesson, confirmed by the Finance Act 2025 amendment, is that mixing in STCG or LTCG income leaves a residual bill no rebate can clear. Model the gains separately on the capital gains calculator.

There is a fourth situation worth pricing: income just above Rs 12 lakh in the new regime. A resident with a total income of Rs 12,10,000 has gross tax of Rs 61,500 (Rs 60,000 up to Rs 12 lakh, plus 15% on the Rs 10,000 above it). Without relief that would be punishing, because earning Rs 10,000 more would trigger Rs 61,500 of tax. Section 87A therefore carries marginal relief in the new regime: the tax payable is capped at the amount by which income exceeds Rs 12 lakh, so Meera's neighbour pays just Rs 10,000 plus 4% cess of Rs 400, a total of Rs 10,400. This relief tapers off near Rs 12,70,588 of income, after which normal slab tax is lower than the capped amount. Our dedicated marginal relief calculator shows where the band ends for any figure.

The practical takeaway for FY 2025-26 is to compute total income first, separate any special-rate gains, then apply the correct ceiling for your chosen regime. A salaried resident under Rs 12.75 lakh gross almost always pays nil in the new regime, while old-regime filers benefit from Section 87A only below Rs 5 lakh and should usually rely on deductions instead. Verify the final number against the Income Tax Department return utility before submitting.

FAQ

How much is the Section 87A rebate in the new regime for FY 2025-26?

It is up to Rs 60,000 for FY 2025-26 (AY 2026-27), following the Finance Act 2025 amendment to Section 87A that raised the ceiling to a Rs 12,00,000 total income. The rebate fully offsets the slab tax on income up to that limit, taking the liability to zero for a resident individual whose income is taxed at slab rates.

Can an NRI claim the Section 87A rebate?

No. Section 87A is available only to a resident individual, so a non-resident cannot claim it in either the old or the new regime, regardless of income level. An NRI earning Rs 4 lakh of taxable Indian income still pays tax from the first taxable slab. Confirm your status using the 182-day and 60-day rules before assuming eligibility.

Does the rebate cover capital gains tax?

Not for special-rate gains. Tax on short-term equity gains under Section 111A (20%), long-term gains under Section 112, and long-term equity gains under Section 112A (12.5% above the Rs 1.25 lakh exemption) is excluded from Section 87A by the Finance Act 2025. Slab-rate income up to the ceiling is still rebated, but the gains tax remains payable along with 4% cess.

What happens if my income is Rs 12,05,000 in the new regime?

You lose the flat rebate because income exceeds Rs 12,00,000, but marginal relief applies. Your tax is capped at the Rs 5,000 by which income crosses the ceiling, plus 4% cess of Rs 200, totalling Rs 5,200, instead of the Rs 60,750 of gross slab tax that would otherwise arise. The relief band runs up to roughly Rs 12,70,588 of total income.

Should I pick the old regime just for the rebate?

Rarely. The old-regime rebate stops at Rs 5,00,000 of total income, far below the new regime's Rs 12,00,000. The old regime makes sense only when deductions such as 80C, 80D, home-loan interest and HRA together exceed the new regime's wider slabs and Rs 75,000 standard deduction. Compare both on the old vs new regime calculator before deciding.

How does the standard deduction interact with the Rs 12 lakh ceiling?

The Rs 75,000 standard deduction in the new regime is subtracted before the Rs 12 lakh test, so a salaried resident with gross salary up to Rs 12,75,000 can still reach a Rs 12,00,000 total income and pay nil tax. In the old regime the standard deduction is Rs 50,000, and the rebate ceiling stays at Rs 5,00,000 of total income.

Where can I confirm the current rebate rules officially?

The amended text of Section 87A is published on the India Code portal of the Government of India and within the Income-tax Act pages on the Income Tax Department website. The department's e-filing return utilities for AY 2026-27 apply the Rs 60,000 new-regime and Rs 12,500 old-regime rebates automatically, so cross-checking your computed tax against the utility is the safest final step.