Income Tax Rebate under Section 87A: Zero Tax up to Rs 12 Lakh in FY 2025-26 (AY 2026-27)
The Union Budget 2025 has significantly enhanced the Section 87A rebate under the new tax regime, allowing resident individuals with taxable income up to Rs 12 lakh to pay zero income tax. This change, effective for FY 2025-26 (AY 2026-27), marks a substantial relief for middle-income earners, with the rebate capped at Rs 60,000, up from the previous Rs 25,000 limit for incomes up to Rs 7 lakh.[1][2][3]
Understanding Section 87A Rebate: Key Features and Mechanism
A tax rebate under Section 87A directly reduces the income tax liability, unlike deductions that lower taxable income. It provides 100% rebate on tax payable up to specified limits, effectively making tax zero for eligible taxpayers. This benefit is exclusive to resident individuals and does not apply to HUFs, NRIs, companies, or incomes taxed at special rates like capital gains from equity or winnings from gambling.[1][4][5]
For FY 2025-26, the rebate is automatically calculated during e-filing if eligibility criteria are met. Marginal relief ensures that slight exceedances do not disproportionately increase tax burdens.[3]
Rebate Limits: Old vs New Tax Regime
- Old Regime: Rs 12,500 rebate for taxable income up to Rs 5 lakh.
- New Regime: Rs 60,000 rebate for taxable income up to Rs 12 lakh.
This upgrade in the new regime offers broader coverage, making it more attractive for salaried individuals without extensive deductions.[1][2][3]
Eligibility Criteria and Exclusions
To claim the rebate, taxpayers must be resident individuals with total taxable income within the limits. Under the new regime, incomes up to Rs 12 lakh qualify for full rebate, wiping out tax liability calculated at slab rates (e.g., 5% on income from Rs 4 lakh to Rs 12 lakh yields Rs 60,000 tax, fully rebated).[3]
Key Exclusions
- Short-term capital gains (STCG) from equity shares or equity mutual funds (from FY 2025-26 in new regime).
- Long-term capital gains (LTCG) from listed equity shares or equity mutual funds (rebate not applicable).
- Incomes from lotteries, gambling, online gaming, or virtual digital assets (taxed at flat 30%).
- Special rates income, surcharge, or cess portions.[4][5]
Example: For Rs 12 lakh income under new regime, tax before rebate is Rs 60,000 (after 4% cess), reduced to zero via Section 87A.[3]
Under old regime, Rs 5 lakh income with Rs 12,500 tax liability gets full rebate.[1][2]
Budget 2026 Expectations and Unchanged Rules
Budget 2026 maintained the Section 87A provisions unchanged from FY 2025-26, disappointing those hoping for further hikes to Rs 15-20 lakh limits to boost middle-class consumption. The Rs 12 lakh threshold and Rs 60,000 rebate cap persist for FY 2026-27 (AY 2027-28), prioritizing fiscal stability over expanded relief.[4][5]
Taxpayers should compare regimes: New regime suits those with incomes up to Rs 12 lakh due to higher rebate and simpler slabs, while old regime benefits deduction-heavy filers. Use tools like ClearTax for automatic rebate application.[3]
Planning tip: Maximize standard deduction (Rs 75,000 in new regime) to stay under Rs 12 lakh post-deductions. Consult a CA for hybrid incomes involving exclusions.[2]
This rebate empowers over 7 crore taxpayers with zero tax liability, enhancing disposable income amid rising living costs. Stay updated via official portals for AY 2026-27 filings.[1][6]