Section 87A Rebate FY 2026-27 — Who Gets ₹12 Lakh Tax-Free? (With Calculator)

What is Section 87A Rebate?

Section 87A of the Income Tax Act gives eligible taxpayers a direct rebate — a rupee-for-rupee reduction in the tax they owe, applied after the tax is calculated but before cess is added. It is not a deduction from income; it is a credit against your final tax liability. If your computed tax is ₹40,000 and you qualify for the full 87A rebate, your tax becomes zero.

The rebate was introduced to provide meaningful relief to middle-income earners and has been progressively expanded. For FY 2026-27, the government made a landmark change: under the New Tax Regime, the Section 87A rebate has been raised to ₹60,000, and it applies to taxable incomes up to ₹12,00,000. This single change effectively makes an annual income of up to ₹12 lakh entirely tax-free for most salaried individuals.

Who is Eligible for the 87A Rebate in FY 2026-27?

To claim the Section 87A rebate, you must meet all of the following conditions:

• Resident individual only. HUFs, companies, firms, and non-resident Indians (NRIs) cannot claim this rebate.
• Net taxable income must not exceed the threshold. Under the New Regime, your taxable income (after the standard deduction of ₹75,000) must be ₹12,00,000 or less. Under the Old Regime, the threshold remains ₹5,00,000.
• Income must be from ordinary sources. Special-rate income — such as long-term capital gains (LTCG) taxed at 12.5% or short-term capital gains (STCG) taxed at 20% — does not qualify for the rebate. If you have LTCG that pushes your total income above ₹12 lakh, the rebate may be partially or fully unavailable.
• Must file an ITR. The rebate is claimed when you file your Income Tax Return. It is not automatically withheld from TDS in all cases.

The Big Change: Why ₹12 Lakh Income is Now Completely Tax-Free

Here is why ₹12 lakh gross income results in zero tax for a salaried employee under the New Regime for FY 2026-27:

• Gross salary: ₹12,75,000 (or ₹12,00,000 for non-salaried)
• Less standard deduction (salaried): −₹75,000
• Net taxable income: ₹12,00,000

Now apply the New Regime slabs to ₹12,00,000:

• ₹0–₹4L at 0% = ₹0
• ₹4L–₹8L at 5% = ₹20,000
• ₹8L–₹12L at 10% = ₹40,000
• Total computed tax = ₹60,000

Section 87A provides a rebate of up to ₹60,000 when taxable income ≤ ₹12,00,000. The rebate exactly cancels out the ₹60,000 tax. Net tax payable = ₹0. No cess is added because cess applies on tax, and the tax is zero.

For salaried individuals, the ₹75,000 standard deduction means a gross salary of up to ₹12,75,000 results in a taxable income of ₹12,00,000 — and therefore zero tax. This is the "effective ₹12.75L tax-free" figure you often see cited.

Exact Tax Calculations at Four Income Levels

₹10 Lakh Income — Zero Tax

* Old Regime assumes ₹1.5L 80C deduction, no other deductions.

₹12 Lakh Income — Zero Tax with 87A Rebate

Taxable income under New Regime = ₹12,00,000 − ₹75,000 (standard deduction) = ₹11,25,000 for salaried. Computed tax = ₹0 + ₹20,000 + ₹32,500 = ₹52,500. Since ₹11.25L ≤ ₹12L, full rebate applies. Tax = ₹0.

For a non-salaried individual with exactly ₹12,00,000 income: taxable income = ₹12,00,000, computed tax = ₹60,000, rebate = ₹60,000. Tax = ₹0.

Under the Old Regime with 80C: taxable = ₹10,50,000. Tax = ₹50,000 + ₹10,000 = ₹1,10,000 + 4% cess = ₹1,14,400.

₹12.5 Lakh Income — Tax Kicks In

This is the critical threshold. Once your taxable income crosses ₹12,00,000, the entire ₹60,000 rebate is lost — not just the portion above the limit. This creates a notch in the tax system.

Salaried individual with ₹12.5L gross income: taxable = ₹12,50,000 − ₹75,000 = ₹11,75,000. Computed tax = ₹20,000 + ₹37,500 = ₹57,500. Taxable income is ≤ ₹12L? Yes → rebate applies. Tax = ₹0.

Non-salaried individual with ₹12.5L income: taxable = ₹12,50,000. Computed tax = ₹60,000 + ₹7,500 = ₹67,500. Taxable income exceeds ₹12L → no rebate. Add 4% cess: ₹70,200 total tax.

The lesson: if your non-salaried income is between ₹12L and roughly ₹12.77L, you may actually pay more tax on ₹12.1L than on ₹12L — the so-called "rebate cliff." However, marginal relief provisions prevent the tax from exceeding the income above ₹12L, so the government does cap this anomaly.

₹15 Lakh Income — Full Calculation

* Old Regime: ₹1.5L 80C + ₹25K 80D deductions assumed.

At ₹15L, the New Regime saves approximately ₹37,700 compared to the Old Regime with standard deductions.

Frequently Asked Questions About Section 87A

Does the 87A rebate apply to capital gains income?

Partially. Section 87A does not apply to special-rate capital gains — specifically LTCG on equity/mutual funds taxed at 12.5% (Section 112A) and STCG taxed at 20% (Section 111A). However, if your total income including these gains is below ₹12L, the rebate still applies to the ordinary income portion. In practice, if your LTCG income causes your total income to exceed ₹12L, the rebate is not available on that excess.

Can I claim 87A under the Old Regime in FY 2026-27?

Yes, but with much stricter limits. Under the Old Regime, Section 87A provides a rebate of up to ₹12,500 — and only if your net taxable income (after all deductions) does not exceed ₹5,00,000. Given the Old Regime's 5% slab between ₹2.5L–₹5L, the maximum tax at ₹5L is exactly ₹12,500, which is fully offset by the rebate — making income up to ₹5L tax-free under the Old Regime too.

Is the standard deduction automatically included when checking the ₹12L rebate threshold?

Yes. The 87A eligibility check is based on your net taxable income, which is after the standard deduction of ₹75,000. So a salaried person earning ₹12,75,000 has a net taxable income of ₹12,00,000 — right at the limit — and qualifies for the full rebate. This is why the effective tax-free salary threshold is ₹12.75L, not ₹12L.

What is marginal relief under Section 87A?

Marginal relief prevents a sharp tax jump for income slightly above the ₹12L threshold. If your taxable income is, say, ₹12,10,000 (just ₹10,000 above ₹12L), without relief you would owe tax on the full ₹12.1L — roughly ₹62,000 — on an excess of just ₹10,000. Marginal relief caps the tax payable at the amount by which your income exceeds ₹12,00,000. So at ₹12.1L, your tax cannot exceed ₹10,000 (plus cess). This relief phases out as income rises further.

Do I need to claim 87A separately, or is it automatically applied?

When you file your ITR using the Income Tax e-filing portal, the 87A rebate is automatically computed by the system if you are eligible. However, if your employer's TDS was calculated without the rebate (common when the employer is unsure of other income sources), you may have excess TDS deducted. In that case, the rebate shows up as a refund after you file your ITR — another reason why filing on time matters.