For many salaried Indians, the words “no tax up to Rs 12 lakh” sound too good to be true. They are true — but only because of one small provision: Section 87A. It is the rule that turns a Rs 60,000 tax bill into zero. This guide explains how it works, who can use it, where it does not apply, and what happens when your income goes just past Rs 12 lakh.
Section 87A of the Income Tax Act, 1961 gives resident individuals a rebate on the tax they owe — not a deduction from income. In the new tax regime for FY 2025-26, the rebate can wipe out up to Rs 60,000 of tax, so a resident individual with taxable income of Rs 12 lakh or less pays no income tax at all.
What Is the Section 87A Rebate?
Section 87A is a rebate. A rebate cuts your tax bill directly. A deduction, by contrast, cuts your taxable income first, and the tax saving depends on your slab.
Here is the difference in one line: a Rs 60,000 rebate removes Rs 60,000 of tax. A Rs 60,000 deduction removes Rs 60,000 of income, which saves only Rs 6,000 to Rs 18,000 of tax depending on the slab.
The rebate is applied after you work out the tax on your income using the slab rates, and before the 4% health and education cess is added. It is capped at your actual tax payable — if your tax is Rs 20,000, the rebate is Rs 20,000, not Rs 60,000.
The Union Budget 2025 raised the rebate sharply for FY 2025-26 (assessment year 2026-27). The income ceiling went from Rs 7 lakh to Rs 12 lakh, and the maximum rebate went from Rs 25,000 to Rs 60,000. Budget 2026 left these figures unchanged, so the same limits apply for the next year too.
From 1 April 2026, the Income Tax Act, 2025 takes over. The rebate provision is renumbered as Section 156, but the idea stays the same. Income earned till 31 March 2026 still cites Section 87A of the 1961 Act.
How Much Rebate Do You Get?
The limits depend on which tax regime you choose.
| Tax regime | Taxable income must not exceed | Maximum rebate |
|---|---|---|
| New regime (FY 2025-26) | Rs 12,00,000 | Rs 60,000 |
| Old regime (FY 2025-26) | Rs 5,00,000 | Rs 12,500 |
In both cases the rebate is the lower of your actual tax and the maximum shown above. The limit is on taxable income — income after deductions — not on your gross salary. That one word, taxable, is where most of the confusion comes from.
How Does the Rs 12 Lakh Zero-Tax Limit Actually Work?
Take a typical salaried employee under the new regime.
| Detail | Amount (Rs) |
|---|---|
| Gross salary | 12,75,000 |
| Less: standard deduction (new regime) | 75,000 |
| Taxable income | 12,00,000 |
Now apply the new-regime slabs for FY 2025-26:
| Slab | Rate | Tax (Rs) |
|---|---|---|
| Rs 0 – 4,00,000 | Nil | 0 |
| Rs 4,00,001 – 8,00,000 | 5% | 20,000 |
| Rs 8,00,001 – 12,00,000 | 10% | 40,000 |
| Total slab tax | 60,000 |
The Section 87A rebate is Rs 60,000 — exactly the tax computed. Tax after rebate: Rs 60,000 minus Rs 60,000 = Rs 0. Cess is 4% of zero, which is zero. Final tax payable: Rs 0.
Because of the Rs 75,000 standard deduction, a salaried person can earn a gross salary of up to Rs 12,75,000 and still pay no tax under the new regime. The Rs 12 lakh figure is the limit on taxable income, not on salary. Pensioners get the same Rs 75,000 standard deduction on pension income, and family pension gets a separate deduction of up to Rs 25,000 under the new regime.
The old regime works the same way at a smaller scale. Take taxable income of Rs 4,80,000. Old-regime slabs give 5% on Rs 2,30,000 (the part above Rs 2,50,000), which is Rs 11,500. The rebate is the lower of Rs 11,500 and Rs 12,500 — so Rs 11,500. Tax after rebate: Rs 0.
What Is Marginal Relief and How Does It Work?
Without marginal relief, earning one rupee above Rs 12 lakh would cost you the full Rs 60,000 rebate at once. The law prevents that cliff with marginal relief, which applies only under the new regime.
The rule is simple: if your taxable income is just above Rs 12 lakh, your tax cannot exceed the amount by which your income exceeds Rs 12 lakh.
Worked example — taxable income Rs 12,10,000:
| Step | Calculation | Amount (Rs) |
|---|---|---|
| Slab tax on first Rs 12 lakh | As above | 60,000 |
| Tax on the extra Rs 10,000 (15% slab) | 15% of 10,000 | 1,500 |
| Total slab tax | 60,000 + 1,500 | 61,500 |
| Income above Rs 12 lakh | 12,10,000 − 12,00,000 | 10,000 |
| Tax payable after marginal relief | Capped at the excess income | 10,000 |
| Add 4% cess | 4% of 10,000 | 400 |
| Final tax payable | 10,400 |
Without marginal relief, the tax would have been Rs 61,500 minus the Rs 60,000 rebate — but that is not how the relief works. The rebate itself is reduced so that the tax you actually pay equals the income above the threshold. You pay Rs 10,400 in total, not Rs 61,500.
Marginal relief fades out as income rises, and it ends at around Rs 12.7 lakh of taxable income. Beyond that point the normal slab rates apply in full, because the slab tax itself becomes smaller than the excess income. The old regime has no marginal relief at all — cross Rs 5 lakh by even one rupee and the rebate is gone in full.
Who Can Claim the Section 87A Rebate?
Only resident individuals can claim it. That is the whole eligibility test, and it is strict.
You can claim it if:
- You are an individual, not a company or firm.
- You are a resident of India for the relevant financial year.
You cannot claim it if you are:
- A non-resident Indian (NRI), even if the income is earned in India.
- A Hindu Undivided Family (HUF).
- A firm, LLP, or company.
- An Association of Persons (AOP) or Body of Individuals (BOI).
Your employer will usually factor the rebate into the TDS on your salary, so the benefit reaches you month by month. If TDS was still deducted even though your income qualified — for example, because your employer did not have your full income picture — you can claim the excess back as a refund when you file your return.
Can You Claim Section 87A Rebate on Capital Gains?
This is the most misunderstood part of the rebate. Under the new regime, the rebate applies only to income taxed at normal slab rates. It does not apply to tax on income charged at special rates.
Not eligible for the rebate under the new regime:
- Short-term capital gains on listed equity shares and equity-oriented mutual funds under Section 111A — taxed at 20%.
- Long-term capital gains on the same assets under Section 112A — taxed at 12.5% above Rs 1.25 lakh.
- Income from lottery, betting, and online gaming — taxed at flat special rates.
Eligible for the rebate:
- Salary, business income, and other sources taxed at slab rates.
- Short-term gains on property, gold, and debt funds, which are taxed at slab rates.
- Long-term gains on assets other than listed equity, taxed at slab rates or under the normal provisions.
A mixed-income example makes it clear. Suppose your taxable salary is Rs 9,00,000 and you also made Rs 2,00,000 of short-term gains on listed shares. Total income is Rs 11,00,000, which is within the Rs 12 lakh limit. The slab tax on Rs 9,00,000 is Rs 30,000, and the rebate wipes it out. But the Rs 2,00,000 of share gains is taxed at 20% — Rs 40,000 — and the rebate cannot touch that. Add 4% cess on Rs 40,000 (Rs 1,600) and the total tax is Rs 41,600. The rebate helped, but it did not make the whole bill zero.
Under the old regime, the position is different: the rebate can be set off against tax on capital gains as well, including gains taxed at special rates. If your income is mostly capital gains, the old regime is worth comparing before you choose.
How to Claim the Section 87A Rebate When Filing Your ITR
You do not need to apply for the rebate separately. There is no form for it. Follow these steps and the portal does the rest.
- Collect your documents — Form 16, salary slips, interest certificates, and capital gains statements.
- Choose your regime — compare the new and old regimes on your actual income before you decide.
- Enter all income — salary, business, capital gains, and other sources, with the correct heads.
- Claim your deductions — the Rs 75,000 standard deduction (new regime) or Rs 50,000 (old regime) applies automatically to salary and pension.
- Check the tax computation — the ITR utility calculates slab tax, then applies the Section 87A rebate if your taxable income is within the limit.
- Check marginal relief — for income just above Rs 12 lakh, the portal applies the relief automatically.
- Verify the cess — 4% health and education cess is added only on the tax left after the rebate.
- File and keep the acknowledgement — if excess TDS was deducted, the refund is processed after filing.
If the rebate does not appear in your computation, check three things first: your residential status in the return, your taxable income figure, and whether the income is mostly special-rate gains. One wrong entry in any of these is the usual reason the rebate goes missing.
Section 87A vs Section 80C — Rebate or Deduction?
Both reduce your tax, but they work at different stages. You can claim both together.
| Feature | Section 87A | Section 80C |
|---|---|---|
| Type | Rebate on tax payable | Deduction from gross total income |
| Effect | Cuts tax directly, up to a fixed maximum | Cuts taxable income; the saving depends on your slab |
| Limit (FY 2025-26) | Rs 60,000 (new regime) | Rs 1,50,000 |
| Who can claim | Resident individuals only | Individuals and HUFs, including NRIs |
| When it applies | After slab tax, before cess | Before taxable income is computed |
In practice, Section 80C works first: it brings your taxable income down. Then the Section 87A rebate is applied on the tax computed on that lower income. Under the old regime, the two together are the reason a Rs 5 lakh taxable income can mean zero tax. Under the new regime, Section 80C is not available, so the rebate does the heavy lifting on its own.
Common Mistakes to Avoid
- Confusing salary with taxable income. The Rs 12 lakh limit is on taxable income after the standard deduction. A Rs 12,75,000 salary can be tax-free; a Rs 12,75,000 taxable income cannot.
- Assuming NRIs and HUFs are eligible. Only resident individuals qualify. If you are an NRI, the rebate simply does not apply.
- Expecting the rebate on equity gains. Gains under Sections 111A and 112A are excluded in the new regime. Check the split of your income before assuming zero tax.
- Missing the old-regime cliff. Under the old regime there is no marginal relief. At Rs 5,00,001 of taxable income, the entire Rs 12,500 rebate disappears.
- Forgetting the cess order. The rebate comes before cess, not after. Cess is charged only on the tax that remains after the rebate.
- Not comparing regimes. If your income has a large capital-gains part, the old regime’s wider rebate can sometimes beat the new regime’s higher ceiling.
FAQ
Is Section 87A rebate available in the old tax regime?
Yes. Under the old regime the rebate applies when taxable income is up to Rs 5 lakh, with a maximum of Rs 12,500. There is no marginal relief in the old regime, so crossing Rs 5 lakh by even one rupee removes the whole rebate.
Can NRIs claim the Section 87A rebate?
No. Only resident individuals are eligible. An NRI cannot claim the rebate even if the income was earned in India and is below the limit.
Is the Section 87A rebate available on capital gains?
Under the new regime, only on gains taxed at normal slab rates, such as gains on property or gold. Gains on listed equity shares and equity-oriented mutual funds under Sections 111A and 112A are taxed at special rates and are excluded. Under the old regime, the rebate can apply to capital gains tax as well.
How do I claim the Section 87A rebate?
File your income tax return normally. The e-filing portal or ITR utility calculates the rebate automatically when your taxable income is within the limit and you are a resident individual. No separate form or application is needed.
What is marginal relief under Section 87A?
It is a cap for incomes just above Rs 12 lakh under the new regime. Your tax cannot exceed the amount by which your income exceeds Rs 12 lakh. For example, at Rs 12,10,000 of taxable income, the tax is capped at Rs 10,000 plus cess, or Rs 10,400 in total.
Is 12 lakh salary really tax-free?
A gross salary of up to Rs 12,75,000 can be tax-free for a resident individual under the new regime, because the Rs 75,000 standard deduction brings taxable income down to Rs 12 lakh, and the rebate wipes out the tax. It is not tax-free if the income is mostly special-rate gains or if you are not a resident individual.
Does the Section 87A rebate apply to lottery or betting income?
No. Income from lottery, betting, and online gaming is taxed at special flat rates and is excluded from the rebate, just like equity capital gains under the new regime.
Official Sources
- Income Tax Department — incometax.gov.in
- Income Tax Department e-filing portal — incometaxindia.gov.in
Reviewed by Asuthod Rathod, CA. Last updated: 6 November 2026. This article provides general information and does not constitute tax advice. Tax rules change with every Budget — verify the current limits on the Income Tax Department website before you file.
Editorial byline for eircicai income tax guides — covering the Income Tax Act, 2025, section renumbering, regime comparison, and deductions. Content is reviewed by Asuthod Rathod, CA.