Understanding Section 87A Rebate in the New Tax Regime for FY 2025-26
- Rajesh Kumar Kar
- Apr 21, 2025
- 9 min read
Section 87A rebate in the new tax regime provides substantial relief to resident individuals, particularly those with lower to moderate incomes. This rebate directly reduces the amount of tax payable, sometimes to zero, offering financial ease for taxpayers. The Union Budget 2025 introduced important updates, including an increase in the income threshold and the maximum rebate amount under the new tax regime. These changes have expanded the eligibility for the rebate, making it more accessible to a wider range of taxpayers. With these updates, understanding the specific income limits and eligibility criteria is essential for individuals looking to make the most of the 87A rebate and effectively reduce their tax liability for the financial year 2025-26.
Table of Contents
How Section 87A Works Under the Old Tax Regime
Introduction to Section 87A Rebate in the New Tax Regime
Overview of the Section 87A Rebate
Section 87A of the Income Tax Act provides a rebate on the income tax payable by resident individuals. The rebate aims to reduce the overall tax burden for taxpayers with lower to moderate taxable incomes. Under this section, individuals can avail themselves of a reduction in their tax liability, which can even bring their payable tax to zero in some cases. This makes Section 87A an essential provision for many taxpayers, particularly those who fall within the lower tax brackets.
Purpose of the Rebate and Its Importance
The primary purpose of the Section 87A rebate is to ease the financial burden on individual taxpayers, especially those with taxable incomes in the lower range. By reducing the amount of tax payable, the rebate allows taxpayers to retain more of their earnings, which can then be utilized for savings, investments, or meeting daily expenses. The rebate has proven to be especially significant for lower-income groups, as it helps them to manage their finances better and contributes to overall financial stability for individuals within this income bracket.
Is Section 87A Rebate Allowed in the New Tax Regime?
Key Changes Under the New Tax Regime for FY 2025-26
The Union Budget 2025 introduced significant modifications to Section 87A under the new tax regime, making it more beneficial for taxpayers. The income threshold for claiming the rebate has been raised from ₹7 lakh to ₹12 lakh, meaning individuals with taxable income up to ₹12 lakh can now avail themselves of the rebate. Furthermore, the maximum rebate amount has been increased from ₹25,000 to ₹60,000, offering greater tax relief to eligible individuals under the new regime.
Income Threshold and Rebate Amount for the New Regime
For the financial year 2025-26, the new tax regime allows individuals with taxable income up to ₹12 lakh to claim the Section 87A rebate. The rebate amount for those eligible under this regime is a maximum of ₹60,000. This increase in the rebate limit significantly widens the scope for taxpayers to benefit from a zero tax liability, provided their taxable income does not exceed the ₹12 lakh threshold. If the taxable income is ₹12 lakh or less, the full rebate amount of ₹60,000 can be claimed, reducing the tax payable to zero.
Eligibility Criteria for the New Tax Regime
To claim the Section 87A rebate under the new tax regime, taxpayers must meet specific eligibility criteria. Only resident individuals are eligible for this rebate. The rebate applies to individuals whose taxable income does not exceed ₹12 lakh for the financial year 2025-26. Additionally, the rebate is available regardless of whether the individual claims deductions like those under Section 80C or other exemptions, as the new tax regime does not allow such deductions. However, taxpayers with income from special sources, such as capital gains, are not eligible for the rebate.
How Section 87A Works Under the Old Tax Regime
Income Threshold and Maximum Rebate for the Old Regime
Under the old tax regime, the Section 87A rebate is available to resident individuals whose taxable income is ₹5 lakh or less. The maximum rebate amount that can be claimed under the old tax regime is ₹12,500. This rebate effectively reduces the tax liability to zero if the tax payable is equal to or less than ₹12,500. Taxpayers whose income exceeds ₹5 lakh are not eligible for this rebate under the old regime.
Rebate Calculation Example Under the Old Tax Regime
For example, if an individual's taxable income is ₹5 lakh, they are eligible to claim the full ₹12,500 rebate, reducing their tax payable to zero. However, if their taxable income exceeds ₹5 lakh, the rebate is no longer available. For instance, if the taxable income is ₹5.5 lakh, the tax payable will be calculated as per the applicable income tax slab, but no rebate can be claimed because the income is above the ₹5 lakh threshold.
How to Calculate and Claim the Section 87A Rebate
Calculation Methods Under the New Tax Regime
Under the new tax regime for FY 2025-26, the Section 87A rebate is calculated based on the taxpayer's taxable income, which must not exceed ₹12 lakh. If the taxable income is ₹12 lakh or below, the rebate amount can be claimed up to ₹60,000. The rebate is applied directly to the tax payable before adding the 4% health and education cess. If the calculated tax payable is less than ₹60,000, the rebate will reduce the tax to zero. If the tax payable exceeds ₹60,000, no rebate is provided.
Calculation Methods Under the Old Tax Regime
In the old tax regime, the calculation for the Section 87A rebate is based on taxable income after applying deductions. The income threshold for claiming the rebate is ₹5 lakh, and the maximum rebate is ₹12,500. If the taxable income is ₹5 lakh or less, the rebate will effectively reduce the tax liability to zero. However, if the taxable income exceeds ₹5 lakh, no rebate can be claimed under the old regime.
Important Considerations for Claiming the Rebate
The rebate is calculated on tax payable before applying the 4% health and education cess.
Special income, such as long-term capital gains from listed equity shares, does not qualify for the rebate.
The rebate is automatically applied when filing your Income Tax Return (ITR), provided eligibility conditions are met.
Taxpayers with mixed income sources should ensure that their income is within the threshold to claim the rebate.
Marginal Relief for Income Slightly Above the Threshold
Explanation of Marginal Relief
Marginal relief is designed to provide relief to taxpayers whose income is slightly above the rebate threshold. For instance, if an individual's income is just above ₹7 lakh (before FY 2025-26) or ₹12 lakh (under the new regime for FY 2025-26), they may lose the rebate entirely due to the tax being higher than the threshold. However, marginal relief ensures that taxpayers only pay tax on the income exceeding the threshold, preventing them from facing a disproportionately high tax burden.
Example Scenarios for Marginal Relief
Consider a scenario under the new tax regime where an individual’s taxable income is ₹12.5 lakh. Without marginal relief, they would lose the full rebate and pay taxes on ₹12.5 lakh as per the applicable tax slab. However, under the marginal relief provision, the rebate is reduced proportionally, and the taxpayer will only pay tax on the amount exceeding ₹12 lakh, making the tax burden more manageable. For example, if the tax payable is ₹60,000 on ₹12 lakh and ₹62,500 on ₹12.5 lakh, the marginal relief would reduce the tax payable to ₹60,000, making the additional ₹500 of income effectively tax-free.
Impact of Budget 2025 Changes on Section 87A
Detailed Look at Changes in the New Tax Regime
The Union Budget 2025 introduced significant changes to the Section 87A rebate, particularly under the new tax regime. The income threshold for claiming the rebate has been increased from ₹7 lakh to ₹12 lakh, allowing more taxpayers to benefit from the rebate. Additionally, the maximum rebate amount has risen from ₹25,000 to ₹60,000. These changes have expanded the scope of the rebate, making it more accessible and beneficial to individuals with taxable income up to ₹12 lakh. The new threshold and increased rebate amount are set to provide substantial tax relief to a larger group of taxpayers under the new tax regime.
Impact on Taxpayers with Capital Gains Income
One key aspect of the Budget 2025 changes is the exclusion of capital gains income from the Section 87A rebate. Taxpayers who receive income from capital gains, such as from the sale of listed equity shares or equity mutual funds, will not be eligible for the rebate. This is an important consideration, as many individuals with substantial capital gains may find themselves unable to benefit from the rebate, despite meeting the income thresholds in other areas. Taxpayers with mixed income sources need to plan their taxes carefully to maximize benefits from Section 87A.
How the Changes Affect Middle-Income Taxpayers
The changes in the new tax regime have a significant impact on middle-income taxpayers, particularly those earning between ₹7 lakh and ₹12 lakh. The increase in the rebate threshold to ₹12 lakh and the rise in the rebate amount to ₹60,000 allows many middle-income individuals to reduce their tax liability to zero, which was not possible before. These changes make the new tax regime more attractive for those who would otherwise have faced higher tax burdens. By increasing the eligibility for the rebate, the Budget 2025 reforms provide relief to a large segment of the Indian workforce.
Common Misconceptions and FAQs about Section 87A Rebate
Clarifications on Who Can Claim the Rebate
A common misconception is that all taxpayers are eligible for the Section 87A rebate. However, the rebate is only available to resident individuals whose taxable income falls under the specified thresholds. For the new tax regime, the threshold is ₹12 lakh, while for the old regime, it is ₹5 lakh. Additionally, the rebate does not apply to non-residents, nor does it apply to individuals with special income, such as long-term capital gains.
Special Income Types Not Eligible for the Rebate
Certain types of income are not eligible for the Section 87A rebate, even if the individual meets the income thresholds. Income that is taxed at special rates, such as capital gains from listed equity shares and equity-oriented mutual funds under Section 112A, is excluded from the rebate calculation. Taxpayers with income from these sources need to be aware that they cannot claim the rebate, even if their total income is within the qualifying limit.
Conclusion
Section 87A provides valuable tax relief, especially for individuals in the lower and middle-income brackets, by reducing the overall tax liability. The changes introduced in the Union Budget 2025 further enhance the rebate under the new tax regime, making it accessible to a larger group of taxpayers with incomes up to ₹12 lakh. While the rebate can significantly reduce tax liabilities, it is important to understand the eligibility criteria and exclusions, particularly regarding special income types like capital gains. Taxpayers should take advantage of these changes to optimize their tax planning and ensure they benefit from the available relief.
FAQs
What is the Section 87A rebate?
Section 87A provides a rebate to resident individual taxpayers, reducing their income tax liability. The rebate amount varies depending on the taxable income and the tax regime, helping lower the tax burden for eligible taxpayers.
How much is the rebate under the new tax regime for FY 2025-26?
Under the new tax regime for FY 2025-26, taxpayers with taxable income up to ₹12 lakh are eligible for a rebate of up to ₹60,000, reducing their tax liability to zero if the tax payable is ₹60,000 or less.
Who is eligible to claim the Section 87A rebate under the new tax regime?
The Section 87A rebate under the new tax regime is available to resident individuals with taxable income of ₹12 lakh or less. However, taxpayers with special income, such as capital gains, are not eligible.
How does the rebate apply under the old tax regime?
Under the old tax regime, individuals with taxable income up to ₹5 lakh are eligible for a maximum rebate of ₹12,500, reducing their tax liability to zero if the tax payable is ₹12,500 or less.
Can a taxpayer with capital gains claim the Section 87A rebate?
No, the Section 87A rebate does not apply to income from capital gains or other special income types, such as long-term capital gains from listed equity shares or equity mutual funds.
What is the income threshold for claiming the Section 87A rebate in the new regime?
The income threshold for claiming the Section 87A rebate under the new tax regime is ₹12 lakh. Taxpayers with taxable income up to this amount can claim a rebate of up to ₹60,000.
How do I calculate the rebate if my income is above the threshold?
If your taxable income exceeds ₹12 lakh under the new tax regime, you are not eligible for the rebate. The rebate only applies to individuals with taxable income up to ₹12 lakh.
Are senior citizens eligible for the Section 87A rebate under the new regime?
Senior citizens aged 60 to 79 years are eligible for the Section 87A rebate under the new tax regime, provided their taxable income does not exceed ₹12 lakh. However, super senior citizens aged 80 and above are not eligible for the rebate.
What happens if my taxable income is slightly above the threshold?
If your taxable income is slightly above the threshold, you may be eligible for marginal relief. This ensures that you don’t face a disproportionate increase in tax liability for income just above the threshold, reducing the rebate accordingly.
How is the rebate calculated if my tax payable is less than the maximum rebate?
If your tax payable is less than the maximum rebate amount, the rebate will match the tax payable, reducing your liability to zero. For example, if the tax payable is ₹40,000, the rebate will also be ₹40,000, making your tax liability zero.
Does the rebate apply to all types of income?
No, the rebate does not apply to special income types like capital gains, interest from foreign bonds, or other income that is taxed at special rates. The rebate is available only for normal income taxed at regular slab rates.
Can I claim the rebate if I have a mixed source of income?
Yes, you can claim the Section 87A rebate if your total taxable income, excluding special income sources, falls within the eligible range. However, income from capital gains or other special rates will not be considered in the rebate calculation.
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