Section 87A Rebate: Pay Zero Tax up to ₹12.75 Lakh in FY 2025-26

Section 87A is one of the most powerful but misunderstood provisions in Indian income tax law. It allows eligible taxpayers to receive a rebate that can reduce their entire tax liability to zero. For FY 2025-26, the New Regime has made this even more generous.

What is Section 87A?

Section 87A provides a tax rebate to resident individuals whose total taxable income falls within a specified threshold. The rebate is applied after computing the slab tax but before adding the health and education cess. The rebate amount equals the lesser of the computed tax or the statutory cap.

How it Works in FY 2025-26

New Regime

If your taxable income is ₹12,00,000 or less, the rebate equals your full tax liability — meaning you pay zero tax. The statutory rebate cap is ₹60,000.

Combined with the ₹75,000 standard deduction, a salaried employee with gross salary up to ₹12,75,000 pays zero tax.

Old Regime

If your taxable income is ₹5,00,000 or less, the rebate equals the lesser of your computed tax or ₹12,500. This effectively makes income up to ₹5 lakh tax-free even under the Old Regime.

Worked Example — New Regime

• Gross Salary: ₹12,50,000
• Less Standard Deduction: ₹75,000
• Taxable Income: ₹11,75,000
• Slab Tax: ₹0 (0-4L) + ₹20,000 (4-8L @5%) + ₹37,500 (8-11.75L @10%) = ₹57,500
• Section 87A Rebate: ₹57,500 (full rebate, income ≤ ₹12L)
• Tax after rebate: ₹0 + 4% cess = ₹0

What Happens if Income is Just Above ₹12 Lakh?

If your taxable income is ₹12,00,001 — just ₹1 above the threshold — you lose the entire rebate. Your tax jumps from zero to approximately ₹60,000 + cess. This "cliff effect" means taxpayers near the ₹12 lakh threshold should carefully evaluate whether incremental income actually benefits them after tax.

The government has provided marginal relief in some cases, but it's always worth calculating precisely using our Income Tax Calculator.

Key Rules to Remember

• Only resident individuals can claim the rebate. NRIs are not eligible.
• The rebate is computed on normal slab income only. Special-rate income (like short-term capital gains) does not benefit from the rebate in most cases.
• The rebate is applied before cess — cess is charged on the tax after rebate.
• The income threshold is checked on total income (taxable), not gross salary.

Old Regime vs New Regime Rebate

• New Regime: Income ≤ ₹12L → rebate up to ₹60,000 → tax = zero
• Old Regime: Income ≤ ₹5L → rebate up to ₹12,500 → tax = zero

Bottom Line

Section 87A effectively creates a zero-tax zone. Under the New Regime in FY 2025-26, this zone extends to ₹12.75 lakh gross salary for salaried individuals — making the New Regime the clear winner for most middle-income taxpayers who don't have large deductions.