EaseValueWhat Happened?
The Income Tax Department has clarified the application of Section 87A rebate for FY 2025-26 (Assessment Year 2026-27) under the new tax regime. The rebate now applies to resident individuals whose total income does not exceed ₹12 lakh, with a maximum rebate of ₹60,000. This is a key relief measure for salaried employees, freelancers, and small business owners opting for the new tax regime introduced in the Income Tax Act 2025.
Background & Legal Context
Section 87A of the Income Tax Act 2025 provides a rebate on income tax for resident individuals whose taxable income falls below a specified threshold. This section is one of the most beneficial provisions for middle-income taxpayers in India.
Key Points About Section 87A:
- Applicable To: Resident individuals only (not HUFs, companies, partnerships, or non-residents)
- Income Threshold for FY 2025-26: Taxable income up to ₹12 lakh
- Maximum Rebate: ₹60,000
- Calculation Method: The rebate is calculated based on the income slab and tax liability
- Tax Regime: Applicable to taxpayers who have opted for the new tax regime under Section 115BAC
Under the new tax regime (Section 115BAC), taxpayers get reduced tax rates but cannot claim most deductions. Section 87A acts as a compensatory relief by providing a flat rebate to ensure taxpayers with lower incomes pay minimal or no tax.
How Section 87A Works in FY 2025-26:
For a resident individual with taxable income up to ₹12 lakh in the new regime:
- If total income is up to ₹5 lakh: Full income tax rebate (tax becomes ₹0)
- If income is between ₹5 lakh and ₹12 lakh: Partial rebate as calculated
- If income exceeds ₹12 lakh: No rebate under Section 87A
The rebate is calculated as the lower of:
- The income tax liability, or
- ₹60,000 (maximum limit)
What Does This Mean for You?
For Salaried Employees (FY 2025-26):
If you earn a salary up to ₹12 lakh per annum and have chosen the new tax regime, Section 87A directly reduces your tax burden. For example, if your income tax liability is ₹45,000, you get a full rebate of ₹45,000, making your net tax payable ₹0.
Important: This applies whether you file an ITR or not, but filing is recommended to claim the rebate formally and maintain tax compliance records.
For Freelancers & Self-Employed:
Business owners with net profit up to ₹12 lakh in the new regime can benefit significantly. However, remember:
- Section 87A rebate applies to taxable income, not gross revenue
- Even in the new regime, you must deduct business expenses to arrive at net taxable income
- Professional expenses, rent, utilities, and employee costs reduce your taxable base
Key Exclusions — Who CANNOT Claim Section 87A:
- Non-Resident Indians (NRIs): Section 87A applies only to residents
- Income exceeding ₹12 lakh: No rebate if your total income crosses this limit
- Old Tax Regime: Section 87A applies ONLY to new regime filers; old regime taxpayers use different relief provisions
- HUFs and Corporates: Not eligible
- Loss Cases: If your business shows a loss, no rebate is needed (no tax payable anyway)
Marginal Relief Provision:
If your income exceeds ₹12 lakh by a small amount, you may be eligible for marginal relief under Section 89(1) of the Income Tax Act 2025. This ensures you don't pay more tax than your additional income earned.
Practical Examples for AY 2026-27 (FY 2025-26)
Example 1: Salaried Employee
Scenario: Raj earns ₹10 lakh salary, opts for new tax regime
- Taxable Income: ₹10 lakh
- Tax under new regime: ₹15,000
- Section 87A Rebate: ₹15,000 (full tax)
- Net Tax Payable: ₹0
Example 2: Income Above ₹5 Lakh
Scenario: Priya's taxable income is ₹11 lakh, new regime
- Taxable Income: ₹11 lakh
- Tax under new regime: ₹52,500
- Section 87A Rebate: ₹52,500 (since it's less than ₹60,000 limit)
- Net Tax Payable: ₹0
Example 3: Income Exceeds ₹12 Lakh
Scenario: Arun's taxable income is ₹15 lakh, new regime
- Taxable Income: ₹15 lakh
- Tax under new regime: ₹1,10,000
- Section 87A Rebate: ₹0 (income exceeds ₹12 lakh limit)
- Net Tax Payable: ₹1,10,000
What Should You Do Now?
Immediate Action Items:
- Verify Your Regime Choice: Check your last ITR filing to confirm you've opted for the new tax regime. If you filed under old regime, Section 87A won't apply.
- Calculate Your Taxable Income: For FY 2025-26, estimate your total income (salary + business profit + other sources) minus eligible deductions to determine if you fall within ₹12 lakh limit.
- Plan Your Deductions: Even in new regime, business owners can reduce taxable income through legitimate business expenses — this might push you below ₹12 lakh and increase rebate benefits.
- File Your ITR on Time: To formally claim Section 87A rebate, file your Income Tax Return by the due date (31 July 2026 for FY 2025-26). Late filing may attract penalties.
- Maintain Records: Keep all income-related documents (salary slips, business ledgers, invoices) for 6 years in case of IT Department scrutiny.
Special Consideration:
If your income is close to ₹12 lakh, consider whether opting for the new regime with Section 87A rebate is better than the old regime with deductions (Section 80C, 80D, etc.). Sometimes old regime gives better tax savings for high-earners with substantial deductions.
Key Takeaways
- ₹12 Lakh Limit: Section 87A rebate for FY 2025-26 applies to resident individuals with taxable income up to ₹12 lakh in the new tax regime.
- ₹60,000 Maximum Rebate: The rebate caps at ₹60,000; you get the lower of your actual tax liability or ₹60,000.
- New Regime Only: This relief is exclusive to taxpayers who have opted for Section 115BAC (new regime); old regime filers use different relief provisions.
- Full Tax Exemption Possible: If your income is ₹5 lakh or less, you typically get ₹0 tax payable after Section 87A rebate.
- Filing Mandatory: Always file an ITR to formally claim the rebate and avoid future assessments or penalties from the Income Tax Department.
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