Section 87A rebate: when it applies, the ₹12L cliff in the new regime, and what it does NOT cover
The Section 87A rebate makes income up to ₹12L taxable (₹12.75L gross) completely tax-free under the new regime. But at ₹12.25L taxable, your tax suddenly jumps to ₹66,300 — a cliff effect where a ₹25,000 raise costs you ₹41,300 in net income. And the rebate doesn't apply to equity STCG or LTCG at all.
All figures and facts in this article are sourced directly from primary government and regulatory publications — including the Reserve Bank of India, SEBI, EPFO, the Income Tax Department, PFRDA, and IRDAI — and verified before publication. No claim is published from a single source without corroboration.
Part of the Zero to One series — Chapter 2: Old vs new tax regime. Lesson 5. For informational purposes only — not tax advice.
Section 87A of the Income Tax Act provides a tax rebate — meaning if your total tax liability falls at or below a certain threshold, it is completely wiped out. You owe zero. This is different from a deduction (which reduces income) or an exemption (which excludes income). A rebate directly reduces the tax you owe to nil.
Understanding when 87A applies, and crucially when it does not, helps you interpret your tax liability correctly — especially if you are deciding between regimes.
The rebate in numbers for FY 2025-26
Under the new tax regime:
- If your total taxable income is ₹12,00,000 or less: the full tax computed on that income is rebated. Tax payable = ₹0.
- The rebate amount is capped at ₹60,000 (if your tax happens to be below ₹60,000 before the rebate, the rebate equals your actual tax).
- Effective result: gross salary up to ₹12,75,000 (after ₹75,000 standard deduction = ₹12,00,000 taxable) → zero income tax.
Under the old tax regime:
- If your total taxable income is ₹5,00,000 or less: the full tax computed is rebated. Tax payable = ₹0.
- The rebate amount is capped at ₹12,500.
This is why the new regime is substantially more attractive for income up to approximately ₹12.75 lakh gross — the 87A rebate creates a zero-tax zone that does not exist in the old regime at that income level.
How the rebate works step by step
Example — new regime, ₹12L gross salary:
- 0 to ₹4L: ₹0
- ₹4L to ₹8L at 5%: ₹20,000
- ₹8L to ₹11.25L at 10%: ₹32,500
- Total tax before rebate: ₹52,500
Example — new regime, ₹13L gross salary:
- 0 to ₹4L: ₹0
- ₹4L to ₹8L at 5%: ₹20,000
- ₹8L to ₹12L at 10%: ₹40,000
- ₹12L to ₹12.25L at 15%: ₹3,750
- Total: ₹63,750
This is the "cliff" effect: at ₹12.75L gross (₹12L taxable) your tax is ₹0. At ₹13L gross (₹12.25L taxable) your tax jumps to ₹66,300. A ₹25,000 increase in gross salary triggers ₹66,300 in tax.
The cliff: when marginal income above ₹12.75L costs more than the income itself
This cliff is real, and it is worth knowing about.
If your salary is ₹12.75L gross (₹12L taxable): tax = ₹0.
If your salary increases to ₹13L gross (₹12.25L taxable): tax = ₹66,300.
Your salary went up by ₹25,000. Your tax went up by ₹66,300. Your net position is worse by ₹41,300 after the raise.
This seems unfair — and it is an unintended consequence of how the rebate is structured. The income tax department has acknowledged this "marginal relief" issue but the cliff remains.
Marginal relief is a partial fix: if your income slightly exceeds ₹12L taxable, the tax payable is limited to the amount by which income exceeds ₹12L. So if taxable income is ₹12,10,000 (just ₹10,000 over the limit), your tax should not be more than ₹10,000 (the excess). Check if your tax software applies marginal relief correctly — the exact mechanism is technical and not always handled well.
What the rebate does NOT apply to
This is critical — and one of the most common mistakes in ITR filing.
The 87A rebate does not apply to:
- Short-term capital gains (STCG) on equity under Section 111A (taxed at 20%)
- Long-term capital gains under Section 112A (equity LTCG taxed at 12.5%)
- Special rate income in general
Practical consequence: If your salary income is ₹10L (within the ₹12L rebate limit) but you also have ₹1L of equity STCG, the 87A rebate offsets your salary tax — but you still owe 20% STCG on the ₹1L, even though your total income is under ₹12L.
This surprises many investors who assume a total income under ₹12L = zero tax on everything. It does not. STCG and LTCG from equity are taxed separately and the rebate does not shield them.
⚠ Common mistake in ITR software: Some older or poorly-implemented tax calculators apply the 87A rebate to STCG tax, incorrectly showing zero tax. The income tax portal may flag this at processing. Ensure your ITR software handles Section 111A income correctly and does not apply the rebate to it.
The old regime rebate: ₹5 lakh threshold
Under the old regime, the 87A rebate applies if total taxable income (after all deductions) is ₹5 lakh or below. The rebate is up to ₹12,500.
This is effectively: if your old-regime taxable income is ≤ ₹5L, you pay zero tax regardless. Given old-regime slabs:
- Tax on ₹5L: 5% on ₹2.5L (above exemption) = ₹12,500
- Rebate: ₹12,500
- Net tax: ₹0
For someone with large 80C + HRA + 80D deductions under the old regime who can bring taxable income below ₹5L, this rebate eliminates their tax entirely. But for most salaried employees at ₹10L+ gross, the old regime rarely gets taxable income to ₹5L even with maximum deductions.
The bottom line for regime choice
- New regime: ₹12L taxable income threshold. Zero tax up to ₹12.75L gross salary.
- Old regime: ₹5L taxable income threshold. Zero tax only if you can reduce taxable income below ₹5L with deductions — very difficult above ₹10L gross.
- The 87A rebate cliff at ₹12.75L gross (new regime) is real: a salary increment above this can temporarily reduce take-home pay.
- The rebate does not apply to equity STCG or LTCG — these are taxed at their special rates regardless of total income.
This completes our look at the specific deductions and rebates in both regimes. The final lesson in this chapter covers regime switching: can you change your mind each year?
Sources: Section 87A rebate, Income Tax Department · Tax rebate guide, ClearTax
Last verified: June 2026. Section 87A limits are per Finance Act 2025 for FY 2025-26.
Content on Ek Crore is for educational purposes only. Nothing here is financial advice. Always consult a SEBI-registered advisor, CA, or qualified professional before making investment or tax decisions.