87a Rebate in New Tax Regime: Eligibility and Tax Saving Explained Indian tax payers has some good news, the new 87a rebate tax regime was passed by the government. The rules are effective from April 1, 2025.
This guide breaks down the updated section 87A rules simply, including crucial details on how it interacts with capital gains, based on official clarifications. Remember, the new tax regime is the default option unless you actively choose the old regime.
Who Can Claim the Section 87A Tax Rebate? This benefit is exclusively for resident individuals.
You must be classified as a resident in India for tax purposes.
Non-resident individuals NRIS, companies, firms, LLPs, and Hindu undivided families HUFs cannot claim this rebate.
What Exactly is the Section 87A Rebate? Think of it as a direct discount on your calculated income tax. After determining your tax liability based on income slabs, you can reduce this amount by the rebate, provided you meet the eligibility criteria.
The Rule: The rebate amount you get is the lower of:
Your actual calculated income tax liability
The maximum rebate amount specified for your chosen tax regime.
This rebate is applied before calculating the final 4% health and education cess.
Crucial Point: Marginal Relief With the zero tax threshold at 12 lakhs, thanks to the 87A rebate on normal income, earning slightly more could lead to a significant tax jump. Marginal relief prevents this.
What it does: It ensures the extra income you pay due to crossing the 12 Lakh threshold doesn't exceed the actual income you earned above 12 lakhs.
Example FY 2025-26:
Ram’s taxable income under the new regime after 75k SD is 1210000, all from salary.
Rebate: Not eligible
Tax Calculation: as per new slabs, ₹61,500 (Tax on ₹12L is ₹60k + Tax on ₹10k @ 15% is ₹1.5k).
Tax + Cess: ₹61,500 + (4% of ₹61,500) = ₹63,960 (A).
Income Exceeding Threshold: ₹12,10,000 - ₹12,00,000 = ₹10,000 (B).
Apply Relief: Final Tax = Lower of A (₹63,960) and B (₹10,000).
Final Tax Payable: ₹10,000.
Crucial Point: 87 A Rebate and Capital Gains/ Special Tax Rates This section 97A rebate is based on clarification from the official budget documents:
This is a critical update based on clarifications from the official budget documents:
The section 87A rebate is calculated based on the income tax payable on income taxed at normal slab rates as per section 115BAC 1A for the new regime or standard slabs for the old regime.
Crucially, the budget memorandum clarifies that the 87A rebate cannot be used to offset tax calculated on incomes taxed at special rates in Chapter XII of the Income Tax Act.
This includes:
Short-term capital gains section 111A e.g from listed equity shares <1 year.
What this means: Even if your total income, including capital gain,s is below the 12 lakh 5lakhs threshold, the 87A rebate can only reduce the calculated on your normal income component. Any tax calculated at special rates (20%, 12.5%, 20% etc.) on capital gains must be paid separately.
Eg: Salary plus STCG sec 111 A new regime FY 2025-26 Subhra has a taxable salary after SD of ₹11,50,000 and STCG (Sec 111A) of ₹40,000.
Total Taxable Income = ₹11,90,000 (which is ≤ ₹12L). Eligible for 87A consideration.
Tax on Salary ₹11.5L (New Slabs): ₹57,500
Tax on STCG @ 20% (Sec 111A): ₹8,000 (20% of ₹40k)
Total Tax Calculated = ₹57,500 + ₹8,000 = ₹65,500
Rebate 87A Applicability: Max potential rebate is ₹60k. However, it only applies against the tax on normal income (₹57,500). So, the actual rebate applied is ₹57,500.
Tax Calculation:
Tax on Salary after Rebate = ₹57,500 - ₹57,500 = ₹0
Tax on STCG (No Rebate Applicable) = ₹8,000
Tax Before Cess = ₹0 + ₹8,000 = ₹8,000
Add 4% Cess = ₹320
Final Tax Payable: ₹8,320 (The tax on STCG remains payable).
Eg: 2 Salary plus LTCG Sec 112A new regime FY 2025-26 Arijit has LTCG section 112A NEW REGIME FY 2025-26
Fatima has a taxable salary (after SD) of ₹11,00,000 and LTCG (Sec 112A) of ₹1,75,000.
Taxable LTCG (Sec 112A) = ₹1,75,000 - ₹1,25,000 (Exemption) = ₹50,000
Total Taxable Income = ₹11,00,000 + ₹50,000 = ₹11,50,000 (which is ≤ ₹12L). Eligible for 87A consideration.
Tax on Salary ₹11L (New Slabs): ₹50,000
Tax on LTCG @ 12.5% (Sec 112A): ₹6,250 (12.5% of ₹50k)
Total Tax Calculated = ₹50,000 + ₹6,250 = ₹56,250
Rebate 87A Applicability: Max potential rebate is ₹60k. Applies only against tax on normal income (₹50,000). Actual rebate applied = ₹50,000.
Tax Calculation:
Tax on Salary after Rebate = ₹50,000 - ₹50,000 = ₹0
Tax on LTCG (No Rebate Applicable) = ₹6,250
Tax Before Cess = ₹0 + ₹6,250 = ₹6,250
Add 4% Cess = ₹250
Final Tax Payable: ₹6,500 (The tax on LTCG remains payable).
Suggested Read: Income Tax Rebate under Section 87A
Key Takeaways for FY 2025-26 Zero tax threshold new regime: Income up to 12 lakhs for salaried results in zero tax, the portions of income taxed at normal slab rates due to enhanced 60k section 87A rebate.
Rebate Limitation: Crucially, the 87A rebate does not apply against tax calculated on the income taxed at special rates like capital gains section 111A, 112, 112A. This tax must be paid separately.
New Regime is Default: Offers a higher rebate threshold of 12 lakhs, 60k Higher basic exemption and higher standard deduction.
Marginal Relief: Protects those earning just above 12 lakhs or 5 lakhs from a disproportionate tax increase.
Capital gains tax: LTCG SEC 112A exemption is 1.2 lakhs on excess, is 12.5% STCG section 111A likely taxed at 20% verify rate. Tax is payable even if the total income is below the 87A threshold.
Old regime: Exemption of Rs 5 lakh 12.5 thousand or ordinary income remains an option for those with substantial deductions under sections 80C, 80D, HRA etc.
Residents only: Section 87A is only for resident individuals.
These updated rules, especially the clarification on special tax rates, are vital for accurate tax planning for fy 2025-26
Suggested Read: Old vs new tax regime: Which One Should You Choose?
FAQS What is the section 87A tax rebate for 2025-26? It’s a direct discount on the income tax for resident individuals whose total income is below specified limits. Under the old tax regime, it’s up to 60k if your total taxable income is 12 lakhs or less. Under the old regime, it’s up to 12500 if your total taxable income is 5 lakhs or less. This rebate effectively makes your tax liability zero on income taxed at normal slab rates up to these thresholds.
Who is eligible for the section 87A rebate? Only resident individuals in India can claim this rebate. It is not available for non residentindividual, Hindu undivided families HUFs companies, firms or LLPS.
Is it true I pay zero tax up to ₹12.75 Lakhs income in FY 2025-26? Yes, under the new tax regime (which is standard), if you are a salaried individual with gross salary up to ₹ 12.75 lakh, the standard deduction of ₹ 75,000 brings your taxable income to ₹ 12 lakh. Exemption of up to ₹ 60,000 under Section 87A will reduce your tax liability.
What if I choose the old tax regime? What is the 87A benefits there? If you opt for old regime and your total taxable income after claiming all eligible deductions is 5 lakhs or less. You re eligible for a tax rebate of up to 12500. This makes your tax liability zeri on income taxed at normal slab rates within this limit.
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