Section 87A Rebate FY 2025-26: How Old And New Regime Thresholds Differ Sharply Now

Under the new tax regime for FY 2025-26 (assessment year 2026-27), Section 87A now delivers a rebate of up to Rs 60,000, lifting the zero-tax ceiling to a total income of Rs 12 lakh. The old regime still caps the very same rebate at Rs 12,500, and only for total income up to Rs 5 lakh. That is a gap of Rs 47,500 in rebate and Rs 7 lakh in the income threshold — a divergence that simply did not exist before the Finance Act 2025 came into force on 1 April 2025.

For a salaried taxpayer the practical effect is stark: with the Rs 75,000 standard deduction baked into the new regime, a gross salary of Rs 12.75 lakh can attract zero income tax, while the same person electing the old regime would owe tax from a taxable income above Rs 5 lakh. This guide walks through the exact statutory wording, three fully worked numbers, and the scrutiny pitfalls our desk sees most often. Every figure here is drawn from the Income Tax Act 1961 as amended by the Finance Act 2025; verify your own slab against the official income tax calculator on incometax.gov.in before filing.

What the Section Says

Section 87A of the Income Tax Act 1961 grants a rebate against tax payable to a resident individual whose total income does not exceed a prescribed threshold. The rebate is deducted from the income tax computed on slab income, before the 4% health and education cess is added. It is not a deduction from income; it is a direct reduction of the tax bill, which is why it can take a liability all the way down to nil.

The Finance Act 2025 reworked the new-regime numbers under Section 115BAC. For FY 2025-26, a resident individual opting for the default new regime gets a rebate equal to the tax payable or Rs 60,000, whichever is lower, provided total income does not exceed Rs 12 lakh. The old regime was left untouched: the rebate there remains the tax payable or Rs 12,500, whichever is lower, for total income up to Rs 5 lakh.

Two limits matter. First, the rebate applies only to tax on income charged at slab rates. It cannot wipe out tax on income taxed at special rates — most notably long-term capital gains on equity under Section 112A, which are taxed at 12.5% above the Rs 1.25 lakh annual exemption. See our note on LTCG for why that carve-out exists. Second, Section 87A is available only to residents; a non-resident gets no tax rebate here, however modest their Indian income.

Worked Example

Take Priya, a salaried employee with a gross salary of Rs 12,75,000 in FY 2025-26 who stays in the default new regime. After the Rs 75,000 standard deduction, her total income is exactly Rs 12,00,000. Applying the FY 2025-26 new-regime slabs, the tax on the first Rs 4 lakh is nil, the Rs 4-8 lakh band at 5% is Rs 20,000, and the Rs 8-12 lakh band at 10% is Rs 40,000 — a total of Rs 60,000. Section 87A then grants a rebate of Rs 60,000, so her tax becomes zero, and with no base tax there is no 4% cess either.

Now the old regime, where the threshold is far lower. Rahul has a total income of Rs 5,00,000 after deductions. Old-regime slabs charge nil up to Rs 2.5 lakh and 5% on the next Rs 2.5 lakh, giving Rs 12,500 of tax. Section 87A rebates exactly Rs 12,500, so Rahul also pays nil — but a single rupee more of income, say Rs 5,00,001, would push him past the threshold and the entire rebate would vanish, leaving roughly Rs 12,500 plus cess on the table. The old regime has no marginal relief to cushion that cliff.

The new regime does cushion it. Consider Meera, whose total income is Rs 12,10,000 — Rs 10,000 over the threshold. Her slab tax is Rs 20,000 plus Rs 40,000 plus 15% of Rs 10,000 (Rs 1,500), or Rs 61,500, and because she crosses Rs 12 lakh she gets no 87A rebate. Marginal relief under the new regime caps her tax so that it cannot exceed the income above Rs 12 lakh — here, Rs 10,000. She therefore pays Rs 10,000 plus 4% cess, or Rs 10,400, instead of Rs 61,500 plus cess. Marginal relief keeps working until total income reaches roughly Rs 12,70,588, beyond which normal slab tax is lower than the relief cap and ordinary rates resume. Run your own figure through the old-versus-new regime comparison to see which side wins for your income.

Common Mistakes

The single most common scrutiny adjustment we see is taxpayers claiming Section 87A against long-term capital gains. If your Rs 11 lakh total income includes Rs 3 lakh of equity LTCG taxed at 12.5% under Section 112A, the rebate offsets only the slab-rate portion; the LTCG tax stands. The Centralised Processing Centre routinely reverses 87A claimed against 112A income in its Section 143(1) intimations, so reconcile this before you file the return rather than after.

A second error is assuming the headline Rs 60,000 rebate exists in the old regime. It does not. Anyone who manually files under the old regime expecting tax to disappear up to Rs 12 lakh will find the rebate stops dead at Rs 5 lakh of total income, capped at Rs 12,500. The Rs 60,000 figure is exclusive to the new regime under Section 115BAC for FY 2025-26.

Third, taxpayers forget marginal relief and over-pay near the threshold. If your income is Rs 12.4 lakh, do not assume you owe the full Rs 69,000 of slab tax; marginal relief limits it to the excess over Rs 12 lakh (Rs 40,000) plus cess. Skipping the relief, or skipping the standard deduction that often pulls gross salary back under Rs 12 lakh in the first place, leaves money behind. The Rs 75,000 standard deduction is automatic for salaried and pensioners in the new regime and needs no proof.

A fourth pitfall is residency. Section 87A is reserved for resident individuals, so returning NRIs who became resident only mid-year should confirm their status before claiming it. Finally, the rebate is per individual and per year — it cannot be carried forward, split across family members, or claimed by Hindu Undivided Families. Model your exact liability on the new regime income tax calculator and cross-check the slab arithmetic on the full income tax calculator before submitting.

FAQ

Is the Rs 60,000 Section 87A rebate available in the old tax regime for FY 2025-26?

No. For FY 2025-26 the Rs 60,000 rebate and the Rs 12 lakh threshold apply only in the new tax regime under Section 115BAC. The old regime continues to allow a maximum rebate of Rs 12,500 for total income up to Rs 5 lakh, exactly as before the Finance Act 2025.

Can I claim Section 87A rebate against long-term capital gains?

No. The rebate cannot be set off against income taxed at special rates, including equity long-term capital gains taxed at 12.5% under Section 112A. The rebate offsets only the tax computed on your slab-rate income. The Rs 1.25 lakh annual LTCG exemption is separate and continues to apply.

How does marginal relief work above Rs 12 lakh in the new regime?

If your total income marginally exceeds Rs 12 lakh, marginal relief ensures the tax payable does not exceed the amount by which your income crosses Rs 12 lakh. For income of Rs 12,10,000, tax is limited to Rs 10,000 plus 4% cess rather than the full Rs 61,500. The relief tapers off near a total income of about Rs 12,70,588.

Does the standard deduction count towards the Rs 12 lakh threshold?

The Rs 12 lakh threshold is measured on total income, which is after the Rs 75,000 standard deduction in the new regime. So a salaried person with gross salary up to Rs 12,75,000 can land at Rs 12 lakh total income and pay zero tax once the rebate applies, assuming no other income.

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

No. Section 87A is available only to resident individuals. A non-resident, including most NRIs, cannot claim the rebate regardless of how small their Indian income is. Residency is determined for the relevant financial year under Section 6 of the Income Tax Act.

Is the rebate applied before or after the health and education cess?

The Section 87A rebate is deducted from the income tax computed on your income, and the 4% health and education cess is then levied on the tax that remains after the rebate. If the rebate reduces your tax to nil, there is no base tax, so no cess is charged either.

Which regime should I choose to maximise the Section 87A benefit?

For most taxpayers with total income at or below Rs 12 lakh and limited deductions, the new regime now produces a lower or nil tax thanks to the Rs 60,000 rebate. The old regime can still win if you have large deductions such as home loan interest, but you must compare both. Use the old-versus-new regime calculator for your exact figures.