Section 87A Rebate FY 2025-26 — Old vs New Regime Limits, Marginal Relief + Capital Gains Restriction

📅 IT Act 2025 transition note: The Income-tax Act, 1961 stands repealed effective 1 April 2026 per Section 536 of the Income-tax Act, 2025. Section 87A rebate moves to the corresponding rebate provision in Chapter VIII of the 2025 Act; the ₹60,000 rebate cap (new regime, income ≤ ₹12 lakh) and ₹12,500 rebate cap (old regime, income ≤ ₹5 lakh) per Finance Act 2025 carry forward substantively unchanged. For FY 2025-26 (AY 2026-27 — last cycle under 1961 Act), Section 87A references remain operative. See the IT Act 2025 transition reference.

Why Section 87A matters in FY 2025-26 (Budget 2025 changed the game)

For middle-income earners, Section 87A is the most consequential provision in the Income Tax Act — it determines the income threshold at which liability drops to zero.

The Finance Act 2025 rewrote the rules under the New Tax Regime while leaving the Old Regime untouched, creating a substantial divergence between the two regimes:

• New Regime: rebate raised to ₹60,000 with threshold raised to ₹12 lakh total taxable income (zero tax up to ~₹12.75 lakh gross salary after ₹75k standard deduction)
• Old Regime: rebate stays at ₹12,500 with threshold at ₹5 lakh total taxable income

The Finance Act 2025 also introduced two structural restrictions on Section 87A under the new regime:

1. Marginal relief for incomes just above ₹12 lakh, smoothing the tax cliff
2. Special-rate income exclusion — rebate cannot be applied to tax on STCG / LTCG on listed equity, crypto income, and other special-rate income; only slab-rate tax qualifies

For the regime-comparison math, see the New vs Old Tax Regime spoke. For the broader income-tax framework, see the Income Tax in India overview.

What Section 87A is (rebate, not deduction)

Common confusion: deductions vs rebates.

• Deduction (e.g., Section 80C, 80D, 80CCD(1B)) — reduces taxable income. At ₹10L income with ₹1.5L 80C → taxable becomes ₹8.5L.
• Rebate (Section 87A) — reduces the tax bill directly. First compute tax on total income per slabs; if income is below the 87A threshold, reduce the tax by up to the rebate amount.

Section 87A operates AFTER slab-based tax computation but BEFORE the 4% Health & Education Cess. The cess applies to the post-rebate tax.

Old Regime — ₹12,500 / ₹5L threshold (unchanged)

The Finance Act 2025 left the Old Regime untouched. For FY 2025-26:

• Threshold: Total Taxable Income (after all Chapter VI-A deductions like Section 80C and Section 80D) must be ≤ ₹5,00,000
• Maximum rebate: ₹12,500

Old-regime slab math: 2.5L–5L is taxed at 5% → ₹12,500. At exactly ₹5 lakh, the slab tax of ₹12,500 is fully offset by the ₹12,500 rebate → zero tax.

The cliff: at ₹5,00,001 total taxable income, the rebate falls away entirely (no marginal relief under the old regime). Tax is then ₹12,500 on the ₹2.5L–5L slab + ₹0.20 on the ₹1 excess + cess.

New Regime — ₹60,000 / ₹12L threshold (Finance Act 2025 change)

For FY 2025-26 onwards under the new regime:

• Threshold: Total Taxable Income must be ≤ ₹12,00,000
• Maximum rebate: ₹60,000

New-regime slabs FY 2025-26: 0–4L Nil · 4–8L 5% · 8–12L 10% · 12–16L 15% · 16–20L 20% · 20–24L 25% · >24L 30%

Slab math at ₹12 lakh: 4L × 0% + 4L × 5% (₹20,000) + 4L × 10% (₹40,000) = ₹60,000. The ₹60,000 rebate fully offsets this → zero tax at exactly ₹12L total taxable income.

Standard deduction interaction — gross salary ₹12.75L → zero tax (salaried)

The Section 87A threshold tests Total Taxable Income (i.e., income AFTER the standard deduction). For salaried employees + pensioners under the new regime, the standard deduction is ₹75,000 (raised from ₹50,000 by Budget 2024).

Item	Amount
Gross salary	₹12,75,000
Less: Standard deduction (new regime)	(₹75,000)
Total Taxable Income	₹12,00,000
Tax per new-regime slabs	₹60,000
Less: Section 87A rebate	(₹60,000)
Final tax (before cess)	₹0

Caveat for non-salaried income: business / professional income (taxed under the head Profits & Gains of Business or Profession) does NOT get the standard deduction. A self-employed taxpayer with ₹12.75L professional income has ₹12.75L Total Taxable Income — above the ₹12L threshold — and the 87A rebate doesn’t apply in full. Marginal relief (below) kicks in instead.

Marginal relief — Section 87A new regime (incomes just above ₹12L)

Without intervention, earning ₹10,000 above the ₹12L threshold would lose the entire ₹60,000 rebate — tax would jump from zero to ₹61,500, a punitive “tax cliff.” The Finance Act 2025 introduced marginal relief specifically for this band:

Rule: if total income exceeds ₹12 lakh, the income tax payable cannot exceed the amount by which total income exceeds ₹12 lakh.

The rebate effectively tapers from ₹60,000 down to zero across the ₹12L → ~₹12.75L band. At ~₹12.75L total taxable income, slab-based tax converges with the excess-over-₹12L amount and marginal relief no longer applies.

Worked examples — FY 2025-26 (ignoring 4% cess for simplicity)

Example 1 — ₹11,00,000 total taxable income (new regime)

• Slab tax: 4L × 0% + 4L × 5% (₹20,000) + 3L × 10% (₹30,000) = ₹50,000
• 87A rebate: limited to actual tax = ₹50,000
• Final tax: ₹0

Example 2 — ₹12,00,000 total taxable income (new regime)

• Slab tax: ₹60,000 (full computation as above)
• 87A rebate: ₹60,000
• Final tax: ₹0

Example 3 — ₹12,50,000 total taxable income (new regime — marginal relief)

• Slab tax: ₹60,000 + 0.5L × 15% (₹7,500) = ₹67,500
• Excess over ₹12L = ₹50,000
• Marginal relief: tax capped at the excess (₹50,000) since slab tax (₹67,500) > excess (₹50,000)
• Final tax: ₹50,000

Example 4 — ₹13,00,000 total taxable income (new regime — no relief)

• Slab tax: ₹60,000 + 1L × 15% (₹15,000) = ₹75,000
• Excess over ₹12L = ₹1,00,000
• Marginal relief: not applicable (slab tax ₹75,000 < excess ₹1,00,000)
• Final tax: ₹75,000

Example 5 — ₹5,00,000 total taxable income (old regime)

• Slab tax: 2.5L × 0% + 2.5L × 5% = ₹12,500
• 87A rebate: ₹12,500
• Final tax: ₹0

Example 6 — ₹6,00,000 total taxable income (old regime)

• Slab tax: 2.5L × 0% + 2.5L × 5% (₹12,500) + 1L × 20% (₹20,000) = ₹32,500
• 87A rebate: NOT available (income exceeds ₹5L threshold + no marginal relief under old regime)
• Final tax: ₹32,500

For the side-by-side regime breakeven analysis at higher income levels, see the New vs Old Tax Regime comparison.

Eligibility — residents only

Section 87A is available to resident individuals only:

• Non-resident individuals (NRIs) — not eligible. Pay tax from the first rupee above the basic exemption limit.
• Hindu Undivided Families (HUFs) — not eligible despite using the same slab structure as individuals.
• Partnership firms, LLPs, companies — not eligible (these entities have flat tax rates, not slabs).
• Resident senior citizens (60+ and super-senior 80+) — fully eligible. The 87A rebate amount and threshold are the same as for non-senior residents under both regimes; no separate enhanced 87A for seniors.

Special-rate income (LTCG / STCG / crypto) and 87A

The Finance Act 2025 inserted a proviso restricting Section 87A rebate under the new regime to tax on income chargeable at slab rates — excluding tax on:

• STCG on listed equity under Section 111A (taxed at 20% post-Budget-2024)
• LTCG on listed equity under Section 112A (taxed at 12.5% post-Budget-2024 + ₹1.25L exemption)
• LTCG on other capital assets under Section 112 (various rates)
• Crypto / Virtual Digital Asset income under Section 115BBH (taxed at 30%)
• Lottery / winnings under Section 115BB (taxed at 30%)
• Other income chargeable at special rates per various sections

Worked example — salary + STCG combination

• Salary: ₹6,00,000
• Standard deduction: ₹75,000 → salary taxable: ₹5,25,000
• STCG on listed equity: ₹4,00,000
• Total income for slab-tax test: ₹5,25,000 (slab) + ₹4,00,000 (special-rate) = ₹9,25,000
• Below new-regime ₹12L threshold for 87A eligibility test in principle

But:

• Slab tax on ₹5,25,000: 4L × 0% + 1.25L × 5% = ₹6,250. Rebate offsets it → ₹0.
• Special-rate tax on ₹4,00,000 STCG: 20% = ₹80,000. 87A rebate cannot offset this under Finance Act 2025 restriction.
• Final tax: ₹80,000 (plus 4% cess).

For the post-July-2024 capital gains regime, see the Capital Gains spoke.

Common Section 87A mistakes

1. Trying to offset LTCG/STCG/crypto tax with 87A under new regime — Finance Act 2025 restriction. The ITR utility blocks the offset at processing.
2. HUF or NRI attempting 87A — system rejects at validation. HUFs use the same slabs as individuals but cannot claim 87A.
3. Treating standard deduction as “income” — forgetting to apply the ₹75,000 standard deduction in the salary schedule, which artificially inflates Total Taxable Income above ₹12L and disqualifies the rebate.
4. Marginal relief miscalculation — applying marginal relief as a flat discount rather than the strict “tax capped at excess over ₹12L” formula.
5. Confusion between new + old regime thresholds — applying the ₹60,000 / ₹12L logic to an old-regime return (where the limits are ₹12,500 / ₹5L) or vice versa.
6. Claiming 87A on old-regime income > ₹5L — no marginal relief under the old regime; the rebate falls away at ₹5,00,001 entirely.
7. Forgetting the rebate is BEFORE cess — computing cess on pre-rebate tax (which inflates the cess liability).

For ITR-form selection guidance + the regime-switch mechanics, see the ITR Form Selector Guide. For end-to-end ITR preparation + filing, see the ITR Filing service.