Section 87A Tax Rebate

What Is Section 87A?

Section 87A of the Income Tax Act, 1961 provides a tax rebate — a direct reduction in the income tax payable — for individual resident taxpayers whose total income does not exceed a specified threshold. Unlike a deduction (which reduces taxable income), a rebate reduces the actual tax bill rupee-for-rupee.

The practical effect: taxpayers with income at or below the applicable threshold pay zero income tax, even though their income technically falls within the taxable slabs.

Section 87A for FY 2026-27 (AY 2027-28)

New Tax Regime (Default)

• Income threshold: ₹7,00,000
• Maximum rebate: ₹25,000
• Effect: If your total income ≤ ₹7,00,000, your income tax liability is reduced to zero

Old Tax Regime

• Income threshold: ₹5,00,000
• Maximum rebate: ₹12,500
• Effect: If your total income ≤ ₹5,00,000, your income tax liability is reduced to zero

This means under the new regime, a taxpayer earning up to ₹7,00,000 pays no income tax whatsoever — despite there being slab rates starting from ₹3,00,001.

How the Rebate Works: Step by Step

Example: New Regime, Income = ₹6,80,000

1. Basic exemption limit: ₹3,00,000 → first ₹3L is tax-free
2. Taxable income: ₹6,80,000 − ₹3,00,000 = ₹3,80,000
3. Tax on taxable income:
   • 5% on ₹3,00,001 – ₹7,00,000 → 5% × ₹3,80,000 = ₹19,000
4. Rebate under Section 87A: ₹19,000 (full rebate since tax < ₹25,000)
5. Tax after rebate: ₹0
6. Health and Education Cess (4%): ₹0
7. Total tax payable: ₹0

The Marginal Relief Cliff at ₹7,00,000

One of the most important nuances: if your income just exceeds ₹7,00,000, the rebate disappears entirely, and you owe the full tax on income from ₹3L onwards. This creates a problematic “cliff”:

At ₹7,00,000: Tax = ₹0 (after rebate) At ₹7,00,001: Tax = ₹25,010 + 4% cess = ₹26,010

A ₹1 higher income results in ₹26,010 more tax payable. This is the sharpest cliff in Indian income tax.

To soften this, the Finance Act introduced a marginal relief provision: if your income is above ₹7,00,000, the tax payable cannot exceed the amount by which your income exceeds ₹7,00,000. In practice:

• At ₹7,05,000 (₹5,000 above threshold): Tax limited to ₹5,000 + cess = ₹5,200
• At ₹7,25,000: Tax limited to ₹25,000 + cess = ₹26,000
• At ₹7,28,000 and above: Marginal relief no longer applies — full slab tax applies

The marginal relief therefore gradually phases in tax liability between ₹7,00,001 and approximately ₹7,27,000.

Standard Deduction + Section 87A: The ₹7,75,000 Zero-Tax Ceiling

Salaried employees and pensioners under the new regime also receive a standard deduction of ₹75,000 (introduced from FY 2023-24, enhanced from ₹50,000).

This means:

• Gross salary ≤ ₹7,75,000
• Minus standard deduction of ₹75,000
• Net total income: ₹7,00,000
• Section 87A rebate: Full ₹25,000
• Tax payable: ₹0

A salaried individual earning up to ₹7,75,000 gross effectively pays zero income tax under the new regime — making the new regime extremely attractive for salaries in this range.

Section 87A and Special-Rate Income

An important restriction: Section 87A rebate does not apply to income taxed at special rates, even if total income is within the threshold.

The primary example: Long-Term Capital Gains (LTCG) on listed equity shares (Section 112A). Even if an individual’s total income is ₹6,00,000 (within the ₹7,00,000 threshold), if that income includes LTCG exceeding ₹1,25,000, the LTCG tax (12.5% on gains above ₹1,25,000) is not offset by the 87A rebate.

This was clarified by a 2024 court ruling and subsequent CBDT guidance, ending earlier confusion.

Section 87A vs Section 80C

These serve fundamentally different purposes:

Feature	Section 87A	Section 80C
Type	Rebate (reduces tax directly)	Deduction (reduces income)
Applicable regime	Both old and new (different limits)	Old regime only
Maximum benefit	₹25,000 tax reduction (new)	₹46,800 tax saving (at 30%)
Investment required	No — automatic if income qualifies	Yes — must invest in eligible instruments
Income threshold	₹7L (new) / ₹5L (old)	No income limit

Practical Implications for Tax Planning

1. If your income is near ₹7,00,000 (new regime): Consider timing any additional income carefully. A ₹10,000 bonus that pushes you to ₹7,10,000 saves ~₹20,000 in tax net of marginal relief — but you lose ₹5,000 from marginal relief. The math is complex; run the full calculation.

2. New employees entering the workforce: Typically benefit fully from the Section 87A rebate in their early careers when salaries are below ₹7,75,000 (with standard deduction).

3. Old vs new regime comparison: The zero-tax ceiling of ₹7,75,000 under the new regime (salary + standard deduction + 87A) is often lower than what old-regime taxpayers can achieve through active 80C investment — but requires no investment discipline.

Key Takeaway

Section 87A makes India’s income tax system tax-free up to ₹7,00,000 of income under the new regime (₹7,75,000 for salaried individuals after standard deduction). It is not a deduction — it is a direct rebate that eliminates tax liability for those within the threshold. Use the India income tax calculator to see whether Section 87A applies to your income and which regime minimises your tax.