Section 87A Rebate: Why ₹12 Lakh Income Is Truly Tax-Free Now

The phrase "income up to ₹12 lakh is now tax-free" has been repeated so often since Budget 2025 that it has become its own fact, divorced from the mechanism that actually delivers the result. The mechanism matters. Section 87A doesn''t exempt income from tax — it computes the tax under the regular slabs and then wipes it out with a rebate. The distinction sounds pedantic until you cross the threshold by even one rupee, at which point understanding the mechanism becomes the difference between owing ₹10,000 and owing ₹63,960.

This article walks through how the rebate actually works, the marginal relief that prevents a tax cliff at ₹12 lakh, the specific scenarios where the rebate does and does not apply, and the most common mistakes I see middle-income taxpayers make around it. Use Ganak''s Income Tax Calculator (New Regime) alongside this article to model your own tax position.

How the Section 87A Rebate Actually Works

The new regime under Section 202 of the Income Tax Act, 2025 (formerly Section 115BAC of the 1961 Act) computes tax on a slab-by-slab basis. For FY 2025-26 and FY 2026-27, the slabs are unchanged:

Apply these slabs to a taxpayer earning exactly ₹12 lakh and you get ₹60,000 of tax: 5% on the second ₹4 lakh slab (₹20,000) plus 10% on the third ₹4 lakh slab (₹40,000). The first ₹4 lakh is exempt under the basic threshold. The Section 87A rebate then provides a credit of up to ₹60,000 against this computed tax — wiping it out completely. Final liability before cess: zero. Final liability after 4% cess on zero: still zero.

The rebate is not an exemption from the tax computation. The slabs still apply, the tax is still calculated, the rebate then reduces the calculated tax to zero. This distinction matters because the rebate is capped at ₹60,000 — if your computed tax is ₹40,000, you get a ₹40,000 rebate (the lower of computed tax or ₹60,000), not the full ₹60,000. The rebate cannot create a refund of money you didn''t owe.

The eligibility conditions are narrow. You must be a resident individual — not RNOR, not non-resident. HUFs, partnership firms, LLPs, companies, and trusts cannot claim Section 87A under any circumstances. Senior citizens (60-79) and super senior citizens (80+) qualify if they meet the income threshold; the rebate doesn''t discriminate by age. NRIs are explicitly excluded.

Why Salaried Filers Get to ₹12.75 Lakh, Not Just ₹12 Lakh

The Section 87A threshold of ₹12 lakh applies to taxable income — that is, income after all deductions and exemptions. For salaried taxpayers under the new regime, the standard deduction of ₹75,000 reduces gross salary to taxable income before the slabs apply. So a salaried filer earning ₹12.75 lakh in gross salary lands at ₹12 lakh in taxable income, qualifies for the full ₹60,000 rebate, and pays zero tax.

This is why the headline numbers you see online vary between "₹12 lakh tax-free" and "₹12.75 lakh tax-free." Both are correct depending on what you''re measuring. For a salaried employee whose CTC includes salary plus allowances, the ₹12.75 lakh figure is the practically useful one. For a self-employed professional or pensioner with no standard deduction, the ₹12 lakh figure is the limit.

One caveat for pensioners: the ₹75,000 standard deduction applies to family pension as well, but family pension''s standard deduction is capped at ₹25,000 or one-third of the pension, whichever is lower. So a family pensioner''s effective tax-free threshold is somewhere between ₹12 lakh and ₹12.25 lakh, not the full ₹12.75 lakh that working salaried people get.

Marginal Relief: What Stops the ₹12 Lakh Tax Cliff

This is where most articles online get the math wrong, and where the most consequential decisions get made. Without marginal relief, a taxpayer earning ₹12,00,001 would lose the entire ₹60,000 rebate — paying ₹60,000 in tax on the ₹12L portion plus ₹0.15 on the extra rupee under the 15% slab. One additional rupee of income would cost ₹60,000 in tax. That cliff would be absurd, so the law includes a smoothing provision.

Marginal relief works by capping the additional tax at the additional income. Specifically, if your taxable income exceeds ₹12 lakh but the regular tax computation would result in tax that exceeds the income above ₹12 lakh, your tax is reduced to equal that excess income. The formula:

Final tax payable = Lower of:

• (A) Regular tax computed under slabs + 4% Health and Education Cess
• (B) The amount by which your income exceeds ₹12,00,000

Worked example. Arun earns ₹12,85,000 of gross salary in FY 2026-27. After the ₹75,000 standard deduction, his taxable income is ₹12,10,000. The math:

1. Regular tax under slabs: ₹0 on first ₹4L + ₹20,000 on next ₹4L + ₹40,000 on next ₹4L + ₹1,500 on the ₹10,000 above ₹12L (at 15%) = ₹61,500
2. Plus 4% cess on ₹61,500 = ₹2,460. Total (A) = ₹63,960
3. Income above ₹12L: ₹12,10,000 − ₹12,00,000 = (B) = ₹10,000
4. Final tax payable: Lower of (A) ₹63,960 and (B) ₹10,000 = ₹10,000

Arun pays ₹10,000 in tax instead of ₹63,960. The relief saves him ₹53,960 — a sum considerably larger than the ₹10,000 of extra income that triggered it.

The marginal relief continues to apply until the regular tax computation under slabs drops below the (income above ₹12 lakh) calculation. This crossover happens at approximately ₹12.75 lakh of taxable income (or roughly ₹13.5 lakh of gross salary for salaried filers). Beyond that point, the regular slab computation is lower than the marginal relief amount, so the regular tax applies. From this crossover onwards, you''re paying the regular slab tax with no rebate and no marginal relief — and your effective tax rate climbs as normal through the higher slabs.

Where the Rebate Does NOT Apply: The Critical Caveat

The Section 87A rebate applies to tax computed on income taxed at normal slab rates. It does not apply to tax computed on special-rate income. This is the trap that catches small investors and crypto traders most often.

Specifically, the rebate cannot be set against tax on:

• Long-term capital gains under Section 112A (listed equity, equity mutual funds) — taxed at 12.5% above the ₹1.25 lakh exemption
• Short-term capital gains under Section 111A (listed equity STT-paid) — taxed at 20%
• Other LTCG under Section 112 (property, gold, unlisted shares) — taxed at 12.5% without indexation
• Cryptocurrency gains under Section 115BBH — taxed at flat 30%
• Lottery, horse race, gambling winnings under Section 115BB — taxed at 30%
• Online gaming winnings under Section 115BBJ — taxed at 30%

The implication is real-world consequential. Suppose Vikram, a salaried professional, has ₹10 lakh of gross salary plus ₹3 lakh of LTCG from selling equity mutual funds in the same year. His salary after standard deduction is ₹9.25 lakh — well within the rebate threshold. His salary tax is ₹47,500 (computed under slabs), wiped out by the rebate to zero. But his LTCG of ₹3 lakh, less the ₹1.25 lakh exemption, leaves ₹1.75 lakh taxed at 12.5% under Section 112A — tax of ₹21,875 plus 4% cess. Total tax: ₹22,750. The rebate didn''t touch the LTCG portion at all.

Many small investors expect the ₹12 lakh threshold to cover their total income including capital gains. It doesn''t. Capital gains are computed and taxed separately, the rebate applies only to the slab-rate portion, and the result is often a surprising tax bill at filing time.

Old Regime: The ₹5 Lakh Rebate That Hasn''t Changed

The old tax regime continues to offer a Section 87A rebate of ₹12,500 for taxpayers with total income up to ₹5 lakh. This rebate has been at this level since FY 2019-20 and was not revised in either Budget 2025 or Budget 2026. The threshold ₹5 lakh corresponds to the tax under the old regime slabs at exactly that income level: ₹0 on first ₹2.5 lakh + ₹12,500 on next ₹2.5 lakh = ₹12,500. The rebate wipes it out, leaving zero tax.

For old-regime salaried filers, the ₹50,000 standard deduction extends this to ₹5.5 lakh of gross salary. With the various deductions available under the old regime — 80C up to ₹1.5 lakh, 80D for medical insurance, 80CCD(1B) for additional NPS, HRA, home loan interest under Section 24(b) — a salaried filer with ₹8-10 lakh of gross salary could potentially still land at ₹5 lakh of taxable income and pay zero tax. The math is harder to achieve than under the new regime, but it''s available for those with substantial deductions.

Marginal relief applies under the old regime too, but kicks in at approximately ₹5,00,000 to ₹5,12,500. The mechanic is identical: tax is capped at the income excess above ₹5 lakh.

How to Claim the Rebate

You don''t need to do anything special to claim Section 87A. The rebate is automatic. When you file your ITR through the income tax e-filing portal, the system computes your tax under the chosen regime, applies the slabs, and then automatically reduces the computed tax by the eligible rebate amount. The same logic operates in CA software, in third-party tax filing apps, and in your employer''s payroll system for TDS computation.

What you do need to do is choose the correct regime. The new regime is the default — if you do nothing, you''re in the new regime and get the ₹60,000 / ₹12 lakh framework. If your deductions are large enough that the old regime would be more favourable, file Form 10-IEA to elect the old regime. Salaried taxpayers can switch regimes every financial year directly inside the ITR. Business and professional income earners face one-time switching restrictions.

The TDS calculation by your employer assumes the new regime unless you explicitly elect the old regime through Form 124 (which replaced Form 12BB on 1 April 2026). If you''re a salaried filer earning ₹12 lakh and you''ve elected the new regime, your monthly TDS should be zero through the year. If TDS is being deducted, it usually means either you''re above the threshold or there''s a configuration error in payroll — worth a conversation with HR.

Frequently Asked Questions

Is the entire ₹12 lakh income tax-free, or only the rebate amount?

Functionally tax-free. The slabs still apply and compute a tax of ₹60,000 on income up to ₹12 lakh, but the Section 87A rebate of ₹60,000 wipes that tax out completely. Final liability is zero. The mechanism is a rebate, not an exemption — the law computes the tax and then forgives it. The distinction matters when income exceeds ₹12 lakh, because marginal relief takes over at that point.

Does the rebate apply to capital gains income?

No. The Section 87A rebate applies only to tax computed on income taxed at normal slab rates. Long-term capital gains under Section 112A (12.5%), short-term capital gains under Section 111A (20%), property/gold LTCG under Section 112, cryptocurrency gains under Section 115BBH (30%), and lottery/gaming winnings under Sections 115BB/115BBJ all bypass the rebate. A salaried filer with ₹10 lakh of salary and ₹3 lakh of equity LTCG pays zero tax on the salary portion but full tax on the LTCG above the ₹1.25 lakh annual exemption.

Can NRIs claim the Section 87A rebate?

No. The rebate is available only to resident individuals — not RNOR, not non-resident. HUFs, partnership firms, LLPs, companies, and trusts are also excluded. NRI taxpayers pay slab-rate tax from rupee one (after the basic exemption of ₹4 lakh under the new regime), with no rebate available regardless of income level.

What happens if my income is exactly ₹12,01,000?

Marginal relief takes over. Your regular tax computation would be ₹60,150 (₹60,000 plus 15% on ₹1,000 above ₹12 lakh) plus 4% cess = ₹62,556. But marginal relief caps your tax at the excess income above ₹12 lakh, which is ₹1,000. So your final tax is ₹1,000. You''re effectively paying a marginal rate of 100% on the rupees above ₹12 lakh, but your total tax burden is dramatically lower than the regular computation.

Up to what income does marginal relief apply?

Approximately ₹12.75 lakh of taxable income. At that point, the regular slab tax computation drops below the marginal relief amount, and the regular tax applies. From ₹12.75 lakh onwards, you pay regular slab tax with no rebate and no marginal relief. For salaried filers, this corresponds to roughly ₹13.5 lakh of gross salary (because the ₹75,000 standard deduction shifts the threshold up).

Is the Section 87A rebate available to senior citizens?

Yes for senior citizens (60-79) and super senior citizens (80+), provided they''re resident individuals and meet the income threshold. The rebate doesn''t discriminate by age. However, the basic exemption limits differ in the old regime — ₹3 lakh for senior citizens, ₹5 lakh for super senior citizens versus ₹2.5 lakh for the general population — which interacts with the rebate calculation. Under the new regime, the ₹4 lakh basic exemption applies uniformly across age groups.

Did Budget 2026 change the Section 87A rebate?

No. Budget 2026 made no changes to either the new or old regime slabs, the Section 87A rebate amount, or the marginal relief framework. The ₹60,000 rebate (new regime, up to ₹12 lakh) and ₹12,500 rebate (old regime, up to ₹5 lakh) introduced in Budget 2025 continue unchanged for FY 2026-27 and likely beyond. Plan around the existing structure; don''t base decisions on hypothetical future enhancements.

Sources and Further Reading

This guide is based on Section 87A of the Income Tax Act, 1961, as amended by the Finance Act, 2025, and carried forward into the Income Tax Act, 2025 (effective 1 April 2026). For official references:

• Income Tax e-Filing Portal — official ITR filing reference
• Income Tax India — Section 87A and slab rate notifications
• Salaried Individuals Return Filing Guide — Income Tax Department
• Press Information Bureau — Budget 2025 and Budget 2026 announcements

Last verified: 7 May 2026. This article will be updated if Budget 2027 introduces changes to the Section 87A rebate or marginal relief framework.