Section 87A Rebate: Zero Tax up to ₹12 Lakh in the New Regime

What is Section 87A?

Section 87A of the Income Tax Act provides a tax rebate — a direct reduction in your tax liability — for individuals whose total income falls below a specified threshold. It was introduced in 2013 and has been revised several times since.

For FY 2025-26 under the new tax regime, the rebate equals 100% of your computed tax liability if your total taxable income is ₹12,00,000 or less. In plain terms: zero income tax.

For the old regime, Section 87A provides a rebate up to ₹12,500 for individuals with taxable income up to ₹5,00,000 — a much smaller benefit.

How the 87A rebate is applied

The rebate is applied after computing your tax liability from the slabs, but before adding surcharge and cess. Here is the sequence:

The rebate cannot reduce tax below zero. It brings tax to exactly zero, and cess is then 4% of zero.

The "₹12.75 lakh zero-tax" rule for salaried employees

You will often hear that salaried employees pay zero tax up to ₹12.75 lakh. Here is why:

• A salaried employee gets a ₹75,000 standard deduction under Section 16(ia)
• This is deducted from gross salary before computing taxable income
• So a salaried employee earning ₹12,75,000 gross has a taxable income of ₹12,00,000
• The Section 87A rebate then makes tax zero at ₹12,00,000

The ₹12L limit applies to taxable income, not gross salary. Non-salaried individuals (freelancers, consultants, business owners) do not get the standard deduction — so their zero-tax threshold is ₹12,00,000 gross taxable income, not ₹12.75L.

Marginal relief: what happens just above ₹12 lakh?

Without marginal relief, a taxpayer earning ₹12,00,001 would suddenly owe the full slab tax on ₹12,00,001 — a significant jump from zero. The Finance Act addresses this with marginal relief.

Under marginal relief, your tax liability in the new regime cannot exceed the amount by which your taxable income exceeds ₹12,00,000.

Example:

• Taxable income: ₹12,50,000
• Slab tax (without rebate): ₹62,500
• Tax without marginal relief: ₹62,500 + cess = ₹65,000
• Income above ₹12L: ₹50,000
• With marginal relief: tax = ₹50,000 + 4% cess = ₹52,000

Without marginal relief, the jump from zero (at ₹12L) to ₹65,000 (at ₹12.5L) would make earning the extra ₹50,000 counter-productive — you'd keep only ₹50,000 − ₹65,000 = negative. Marginal relief ensures your after-tax position always improves as income increases.

The marginal relief threshold is specified in the Finance Act 2025 and Income Tax Department guidance.

Effective marginal relief zone

Marginal relief is relevant roughly in the ₹12L to ₹12.75L taxable income range (before considering standard deduction for salaried). Here is what it looks like:

Above ₹13 lakh taxable income (approx.), the raw slab tax exceeds the excess-over-₹12L amount, so marginal relief ceases to apply.

Section 87A in the old regime

In the old regime, Section 87A provides a rebate of up to ₹12,500 for individuals with taxable income up to ₹5,00,000. The rebate is equal to the computed tax if tax < ₹12,500, or ₹12,500 if tax ≥ ₹12,500.

This means: in the old regime, anyone with taxable income up to ₹5L pays zero tax (since the slab tax at ₹5L = ₹12,500, which the rebate fully covers). There is no marginal relief in the old regime at this threshold.

Special capital gains and 87A

An important nuance: the 87A rebate is applied only against tax on normal income (income taxable at slab rates). It cannot be applied against tax on special-rate income such as:

• Short-term capital gains under Section 111A (equity) taxed at 20%
• Long-term capital gains under Section 112A (equity) taxed at 12.5%

So if you have ₹11L in salary and ₹2L in STCG, the rebate only covers the tax on ₹11L. The STCG tax is computed separately and is not offset by the rebate. This was clarified by CBDT in 2024.

Sources

• Finance Act 2025 — Section 87A and marginal relief provisions
• Income Tax Department — rebate under Section 87A
• CBDT Circular No. 4/2023 — TDS implications