Income Tax Rebate Under Section 87A – Meaning and FY 2025-26 Update

Section 87A's rebate has evolved dramatically over recent Budgets, and understanding not just the current limit but the historical trajectory — plus the often-overlooked "marginal relief" mechanism — genuinely matters for accurate tax planning. This guide covers the complete framework, including which types of income the rebate can and cannot offset.

This page covers:

• What the 87A rebate is for FY 2025-26
• Who is eligible to claim this rebate
• Tax rebate rules for senior citizens
• Historical rebate limits across financial years
• Types of income the rebate covers and excludes
• How to claim the rebate step by step
• Marginal relief — solving the "cliff-edge" tax problem

Through the Union Budget 2025-26, the government increased the Section 87A rebate for individual taxpayers choosing the new tax regime significantly:

Due to this rebate, your tax liability becomes zero if your income is within the Rs. 7 lakh or Rs. 12 lakh limit. This change applies only to the new tax regime.

Additionally, salaried taxpayers gain an extra advantage through the higher standard deduction of Rs. 75,000, pushing the effective tax-free income limit to Rs. 12.75 lakh — if your income after deductions stays within this level, you may not have to pay any income tax at all.

The Section 87A rebate is available only to resident individuals in India. It does not apply to:

• Companies
• Partnership firms
• Non-resident individuals
   

The income limit for getting this rebate depends on the tax regime you choose:

• New tax regime: Total income must be Rs. 7 lakh or less (FY 24-25) — now Rs. 12 lakh from FY 25-26 onwards
• Old tax regime: Income must be Rs. 5 lakh or less

If your income stays within these limits, your final income tax liability comes out to zero.

Senior citizens (age 60 and above) can get a tax rebate under Section 87A, just like other individuals. However, super senior citizens (age 80 and above) are not eligible — since they already benefit from a higher basic exemption limit (Rs. 5 lakh), they're excluded from Section 87A benefits.

Under the old tax regime: If a resident individual's total taxable income is less than Rs. 5 lakh, they can claim a rebate of up to Rs. 12,500, though the rebate cannot exceed total tax payable before cess.

Under the new tax regime: If income is up to the applicable threshold, the rebate makes their tax zero.

This table illustrates just how significant the FY 2025-26 jump is compared to prior years — the new regime rebate more than doubled in a single Budget.

The rebate isn't restricted only to normal salary or business income — it can also reduce tax on certain capital gains:

• Normal income: Taxed according to slab rates; rebate reduces the arising tax liability
• Long-term capital gains (LTCG): Cannot apply the rebate to LTCG from listed equity shares or equity-oriented mutual funds (taxed under Section 112A at a flat 12.5%). However, if LTCG arises from other assets (property, unlisted shares, debt funds taxed at slab rates), the rebate is allowed
• Short-term capital gains (STCG): STCG taxed at 20% (from FY 2024-25 onwards) under Section 111A is eligible for the rebate
   

What's not covered: LTCG from listed equity shares or equity-oriented mutual funds, since these are taxed at a flat rate under Section 112A, where the rebate isn't allowed.

1. Determine eligibility: Check if you meet the eligibility criteria — resident individual, income within prescribed limits
2. Calculate taxable income: Consider all income sources, deduct eligible deductions and exemptions
3. Identify the rebate section: Confirm Section 87A applies to your specific income profile
4. Gather necessary documents: Investment proofs, certificates, receipts as applicable
5. File income tax return: Use the appropriate ITR form based on your income sources
6. Verify and submit: Review for accuracy; the rebate is automatically applied by the tax portal if your income is within the specified limit
    

Worked example (New Regime, AY 2026-27): Gross total income Rs. 12,00,000 → Tax @ 5% on income between Rs. 4-12 lakh = Rs. 60,000 → Less rebate under Section 87A = Rs. 60,000 → Tax payable: Nil

Under the new tax regime, Section 87A makes income up to Rs. 12 lakh tax-free — but if your income goes even slightly above this limit, the rebate is removed entirely, and you must pay full tax on your total income. This sudden tax jump for a small income increase can feel genuinely unfair.

To resolve this, the government provides marginal relief — ensuring the extra tax you pay is not more than the extra income you earn beyond the threshold.

Worked example: If your income is Rs. 12,00,000, you pay no tax (rebate applies). If your income increases to Rs. 12,10,000, you lose the rebate, and your tax liability would be Rs. 61,500 as per slabs — far higher than the Rs. 10,000 income increase. Marginal relief corrects this, restricting your tax liability to just Rs. 10,000 instead of Rs. 61,500.

Understanding Section 87A's complete framework — the current Rs. 12 lakh threshold, historical context, and marginal relief mechanism — helps you plan your taxes with genuine precision, particularly if your income sits near this crucial threshold. It also helps you plan major financial decisions, including home loan repayment strategy, more effectively. Bajaj Finance offers home loans from 7.25% p.a.* with amounts up to Rs. 15 Crore* and tenures up to 32 years. Check eligibility today.