Section 87A - Income Tax Rebate under Section 87A

Introduction

Section 87A of the Income Tax Act provides a tax rebate to individual taxpayers with lower income. It allows eligible taxpayers to reduce their tax liability, making tax payments lighter for middle-income groups. With the Union Budget 2025, the tax rebate rules have been updated for FY 2025-26 (AY 2026-27). Section 87A rebate is available under both old and new tax regimes, but eligibility, income limits, and rebate amounts vary. Understanding this rebate is important for tax planning and for reducing income tax legally. In this article, we will explain eligibility, rebate amounts, examples under the old and new regimes, and the process to claim it.

Budget Update - Financial Year 2025-2026

The Union Budget for 2025 has brought some very important and good news for taxpayers, especially those who have chosen the New Tax Regime (the one with lower tax rates but fewer tax-saving options like 80C).

The biggest change is the increase in the income limit for the Section 87A rebate under the New Tax Regime. Earlier, this rebate was available to people whose income was up to ₹7,00,000. Now, for the Financial Year 2025-2026 (which is for the money you earn from April 1, 2025, to March 31, 2026), this limit has been significantly increased to ₹12,00,000 (Twelve Lakh Rupees).

This means that if your total yearly income is up to ₹12,00,000 and you select the New Tax Regime, your tax payable can become zero! The maximum rebate amount has also been raised from ₹25,000 to ₹60,000. This change is a huge relief for the middle-income group, as it leaves more money in their hands.

For people choosing the Old Tax Regime (the one with higher tax rates but many tax-saving options like 80C, 80D, etc.), the rules for Section 87A have not changed. The rebate is still available only if the income is up to ₹5,00,000. This makes the New Tax Regime very attractive for people who don't use many tax-saving options.

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What is an Income Tax Rebate?

An income tax rebate is a reduction in tax liability granted to taxpayers. Instead of paying the full tax calculated, a rebate reduces the total tax payable. Rebates are provided under various sections of the Income Tax Act to benefit specific income groups or to encourage certain activities, like savings or investments. A rebate lowers your final tax, ensuring that taxpayers with lower incomes do not pay excessive tax.

What is an Income Tax Rebate under Section 87A?

Section 87A is a specific rule in the Income Tax Act that gives this special tax discount only to Resident Individuals (people who live in India).

This rebate is designed to help people who earn a modest income. It ensures that if their total taxable income is below a certain limit, they either pay a very small amount of tax or no tax at all.

The amount of rebate you get is the lower of two things:

1. The maximum rebate allowed by law (e.g., ₹60,000 for New Tax Regime).
2. The actual amount of tax you have calculated.

For example, if your tax is ₹25,000, and the maximum rebate is ₹60,000, you will get a rebate of only ₹25,000. This makes your final tax zero. You can never get more greater rebate than the tax you are supposed to pay.

What is the Section 87A Rebate for the Financial Year 2025-2026 and Assessment Year (AY) 2026-2027?

The Financial Year (FY) 2025-2026 is the year when you earn the income (from April 1, 2025, to March 31, 2026). The Assessment Year (AY) 2026-2027 is the next year when you file your tax return for the income earned in FY 2025-2026.

The rules for the Section 87A rebate are different depending on which tax system you choose: the Old Tax Regime or the New Tax Regime. The New Tax Regime has been made much more beneficial from this financial year.

Feature

Old Tax Regime (FY 2025-26 / AY 2026-27)

New Tax Regime (FY 2025-26 / AY 2026-27) - Updated

Maximum Rebate Amount

₹ 12,500

₹ 60,000

Maximum Taxable Income Limit

Up to ₹5,00,000 (Five Lakh Rupees)

Up to ₹12,00,000 (Twelve Lakh Rupees)

Result

Zero Tax if income is up to ₹5,00,000.

Zero Tax if income is up to ₹12,00,000.

Standard Deductions

Available (e.g., ₹50,000 for salaried)

Available (e.g., ₹75,000 for salaried)

Eligibility Criteria for Rebate

To claim the Section 87A rebate, the taxpayer must meet the following conditions:

1. Must be a resident individual in India.
2. Total taxable income should not exceed ₹7 lakh for FY 2025-26.
3. Can claim the rebate under both old and new tax regimes.
4. Taxpayers should file ITR on time and declare their total income correctly.

Note: HUFs, companies, or firms are not eligible for this rebate.

Considerations Before Rebate Under Section 87A

Before claiming the Section 87A rebate, consider:

1. Income Calculation: Ensure total taxable income is correctly calculated after deductions.
2. Applicable Tax Regime: Decide whether to file under old or new regime for maximum benefit.
3. Other Deductions: Deductions under 80C, 80D, etc. affect eligibility.
4. Exceeding Threshold: If income exceeds ₹7 lakh, the rebate is not applicable.
5. Multiple Sources of Income: Include salary, capital gains, and other income to determine eligibility.

Examples of Rebate u/s 87A: Old vs New Tax Regime

Let's look at two people with the same gross income but different choices of tax regimes for FY 2025-2026.

Feature

Person A (Old Tax Regime)

Person B (New Tax Regime)

Gross Total Income

₹ 6,50,000

₹ 6,50,000

Deductions Claimed (80C, 80D, etc.)

₹1,50,000 (Max available deductions)

₹0 (No major deductions allowed)

Standard Deduction

₹ 50,000

₹75,000 (Updated for New Regime)

Total Deductions & Exemptions

₹2,00,000 (₹1,50,000 + ₹50,000)

₹ 75,000

Taxable Income (Income - Deductions)

₹ 4,50,000

₹ 5,75,000

Tax Calculation (Before Rebate)

₹10,000 (Tax on ₹4,50,000)

₹13,750 (Tax on ₹5,75,000)

Maximum Rebate u/s 87A

Up to ₹12,500 (since income ≤ ₹5 lakh)

Up to ₹60,000 (since income ≤ ₹12 lakh)

Tax Rebate Claimed

₹10,000 (Lower of ₹10,000 or ₹12,500)

₹13,750 (Lower of ₹13,750 or ₹60,000)

Final Tax Payable (Before Cess)

₹ 0

₹ 0

Tax Result

No Tax

No Tax

In this example, both people pay zero tax, but Person A had to make investments of ₹1.5 lakh, while Person B did not need to do any major tax-saving investment.

Tax Slab Rates for FY 2025-26 (AY 2026-27) as per Union Budget 2025

Taxable Income (in ₹)

Tax Rate

Up to ₹4,00,000

Nil

₹4,00,001 to ₹8,00,000

5%

₹8,00,001 to ₹12,00,000

10%

₹12,00,001 to ₹16,00,000

15%

₹16,00,001 to ₹20,00,000

20%

₹20,00,001 to ₹24,00,000

25%

Above ₹24,00,000

30%

Note: A 4% Health & Education Cess is added to the tax amount.

Rebate Amount under Section 87A for FY 2025-26

Tax Regime

Taxable

Income Limit

Maximum Rebate Amount

New Tax Regime

Up to ₹12,00,000

Up to ₹60,000 (or the total tax payable, whichever is less)

Old Tax Regime

Up to ₹5,00,000

Up to ₹12,500 (or the total tax payable, whichever is less)

Rebate under the Old Tax Regime

Under the old tax regime, the taxable income is calculated after deductions and exemptions. Eligible taxpayers with income up to ₹7 lakh can claim the Section 87A rebate up to ₹12,500, reducing their tax payable to zero if their total tax is within this limit. This helps middle-income earners save tax and encourages timely ITR filing.

How to Claim Tax Rebate under Section 87A

To claim a rebate under Section 87A:

1. Calculate Total Income: Include salary, business income, capital gains, and other sources.
2. Choose Tax Regime: Decide between old or new regime.
3. Compute Tax Payable: Use applicable slabs to calculate tax before rebate.
4. Apply Rebate: Deduct ₹12,500 or the tax payable, whichever is lower.
5. File ITR: Claim rebate while filing Income Tax Return using ITR forms.
6. Verify: Ensure rebate is applied correctly in tax calculation sheet before submission.

Conclusion

The Income Tax Rebate under Section 87A is a powerful tool designed to provide significant tax relief to resident individuals, particularly the middle class. With the Budget 2025 increasing the income limit to ₹12,00,000 and the maximum rebate to ₹60,000 under the New Tax Regime for FY 2025-2026, many more people will now pay zero income tax. This change makes the New Tax Regime much more appealing. It helps reduce the tax burden and encourages compliance among taxpayers. Understanding eligibility, income thresholds, and the process to claim the rebate is essential to maximizing benefits. Both old and new tax regimes allow taxpayers to avail this rebate, ensuring middle-income earners save money legally and file their ITR correctly.