Section 87A Rebate FY 2026-27 — Is Your Income Up to ₹12.75 Lakh Really Tax-Free?

✓ Calculations verified against Income Tax Act provisions and Finance Act 2025 · FY 2026-27 (AY 2027-28) · Source: incometax.gov.in

Every year after the Budget announcement, the same question floods finance forums, WhatsApp groups, and office corridors: "Is my salary actually tax-free now?" For FY 2026-27, the answer for millions of salaried Indians is yes — but only if you understand exactly how Section 87A works and which income levels it covers.

Section 87A is not a deduction. It is not a slab change. It is a rebate — a direct reduction in your calculated tax liability — that under the New Tax Regime for FY 2026-27 can cancel your entire income tax bill if your taxable income does not exceed ₹12,00,000. For most salaried employees, this means gross salary up to ₹12,75,000 is completely tax-free. But once your income crosses that threshold, the change is sharp — and misunderstanding how the transition works has led many people to either under-plan or over-optimise for the wrong number.

This post walks through every scenario with precise, independently calculated tax figures so you know exactly where you stand.

What Exactly Is Section 87A?

Section 87A of the Income Tax Act provides a rebate — a direct reduction in the amount of tax you owe — to resident individual taxpayers whose net taxable income falls within a specified threshold. It is applied after your tax is computed from the slabs but before health and education cess is added.

Under the New Tax Regime for FY 2026-27, the rebate is up to ₹60,000, available to any resident individual with net taxable income of ₹12,00,000 or below. The rebate reduces your calculated tax by the full amount — up to ₹60,000 — which means for most people at or below this threshold, the final tax payable is zero.

Three things make this different from what most people expect:

First, it is a rebate on calculated tax, not a deduction from income. Your income is not being treated as if it is ₹12 lakh — your actual income is calculated through the slabs, the resulting tax is computed, and then the rebate cancels it. The outcome is zero tax, but the mechanism is different from an exemption.

Second, it only applies under the New Regime. The Old Regime has a much smaller and separately defined 87A rebate with a far lower income threshold — detailed later in this post.

Third, it does not apply to certain types of income regardless of total income level — specifically long-term and short-term capital gains on equity — a nuance that affects investors significantly.

Who Qualifies for Section 87A in FY 2026-27?

You qualify for the Section 87A rebate if all four conditions are met:

One — You are a resident individual under the Income Tax Act. Non-Resident Indians (NRIs) are explicitly excluded from Section 87A regardless of their income level or the nature of their India-sourced income.

Two — You are filing under the New Tax Regime (the default from FY 2025-26 onwards). Under the Old Regime, a different, smaller version of 87A applies.

Three — Your net taxable income for FY 2026-27 does not exceed ₹12,00,000. This is income after the standard deduction of ₹75,000 (for salaried individuals), not your gross salary figure.

Four — The income on which you are seeking the rebate is taxed at normal slab rates, not at special rates. Capital gains on equity shares, lottery winnings, and crypto income are taxed at special rates and are not eligible for the 87A rebate even if your total income is below ₹12 lakh.

Exact Tax Calculations — ₹10L, ₹12L, ₹12.5L, and ₹15L Salaries

These figures are calculated precisely using the standard income tax formula and New Regime slabs for FY 2026-27. Every rupee is verified.

FY 2026-27 New Regime Slabs (for reference)

Standard deduction for salaried individuals: ₹75,000
Health & Education Cess: 4% on tax payable after rebate

Example 1 — ₹10,00,000 Gross Salary

Example 2 — ₹12,00,000 Gross Salary

Example 3 — ₹12,50,000 Gross Salary

This is one many people get wrong, assuming the threshold is exactly ₹12 lakh gross.

₹12.5L gross salary still pays zero tax because taxable income after the ₹75,000 standard deduction is ₹11,75,000 — still within the ₹12L rebate threshold.

Example 4 — ₹15,00,000 Gross Salary

The Complete Zero-Tax Picture — Where Exactly Is the Ceiling?

The exact ceiling for salaried individuals: ₹12,75,000 gross salary → ₹12,00,000 taxable income after ₹75,000 standard deduction → tax of ₹60,000 → fully cancelled by 87A rebate → ₹0 total tax.

Why ₹12.75 Lakh Gross Salary = Zero Tax — The Exact Mechanics

This is the number most people and most articles get wrong. The zero-tax ceiling is not ₹12 lakh gross. It is ₹12,75,000 gross for salaried individuals, because the standard deduction does the heavy lifting.

Here is the precise chain:

The beauty — and the design — of this is that ₹60,000 is both the maximum tax at the ₹12L taxable income level and the maximum 87A rebate amount. They cancel exactly. This is not a coincidence — it is the explicit intent of the Budget 2025 provision.

Marginal Relief — What Happens Just Above ₹12.75 Lakh

The single most misunderstood aspect of Section 87A is what happens when income crosses the ₹12.75L gross threshold. Many people assume that earning ₹13 lakh instead of ₹12.75 lakh suddenly means paying ₹60,000-plus in tax on the full amount. This is incorrect, and the provision that prevents this is called marginal relief.

How marginal relief works

The principle: once taxable income exceeds ₹12,00,000, the Section 87A rebate is lost entirely. However, marginal relief ensures that the additional tax you pay cannot exceed the additional income that caused you to cross the threshold.

In other words: the tax on income just above ₹12L cannot be more than the amount by which your income exceeds ₹12L.

Worked example — ₹13,00,000 gross salary

The income cliff table — crossing ₹12.75L threshold

The ₹13L row shows you take home ₹1,000 less than at ₹12.75L after tax — marginal relief prevents this from being catastrophic, but it illustrates why some employees prefer keeping salary structures at or below the ₹12.75L gross threshold.

Section 87A — New Regime vs Old Regime Comparison

The 87A rebate exists in both regimes but with very different parameters.

What this means practically

Under the Old Regime, the 87A rebate is largely irrelevant for anyone earning above ₹5.5 lakh gross, because the ₹12,500 cap covers only the tax on income up to ₹5 lakh taxable — which is exactly the point at which the 5% slab runs out and Old Regime tax equals ₹12,500 (rebatable) for income at exactly ₹5L taxable. Anyone earning above ₹5.5L gross under the Old Regime pays full slab tax from that point.

Under the New Regime, the ₹60,000 rebate is a genuine game-changer for the ₹8L to ₹12.75L gross salary range — it eliminates what would otherwise be a ₹32,500 to ₹60,000 tax bill for this entire income band.

For income above ₹12.75L, the comparison shifts entirely to how many deductions you can claim. The Old Regime's higher slab rates are partially offset by deductions under 80C, HRA, 80D, and home loan interest. Use the income tax calculator below to see which regime is better for your specific numbers.

Frequently Asked Questions

Is income up to ₹12 lakh completely tax-free in FY 2026-27?

Yes — under the New Tax Regime for FY 2026-27, any resident individual with net taxable income of ₹12,00,000 or below pays zero income tax. The mechanism is Section 87A, which provides a rebate of up to ₹60,000 that cancels the calculated tax entirely at that income level. For salaried individuals who also benefit from the ₹75,000 standard deduction, this zero-tax zone extends to gross salary up to ₹12,75,000 — because the standard deduction brings taxable income down from ₹12,75,000 to exactly ₹12,00,000, where the ₹60,000 slab tax is fully cancelled by the ₹60,000 rebate. Pensioners receiving pension income also qualify for the standard deduction and the same threshold. This benefit is not available under the Old Regime for this income range — under the Old Regime, ₹12,75,000 gross salary attracts tax of approximately ₹1,54,700 (before any 80C or other deductions).

What is the Section 87A rebate amount for FY 2026-27?

Under the New Tax Regime for FY 2026-27, the Section 87A rebate is up to ₹60,000, available to resident individuals with taxable income of ₹12,00,000 or below. The rebate equals your actual calculated tax — so if your slab tax is ₹32,500 (as in the ₹10L gross salary example), the rebate is ₹32,500 and your tax is zero. The ₹60,000 figure is the ceiling, not a flat amount — you only get as much rebate as your actual tax liability. Under the Old Regime, Section 87A is structured very differently: it provides a rebate of up to ₹12,500 for taxable income up to ₹5,00,000. The maximum tax at ₹5L taxable income under the Old Regime is exactly ₹12,500 (5% on ₹2.5L), so the Old Regime rebate effectively makes income up to ₹5.5L gross (₹5L taxable after ₹50K standard deduction) zero-tax — a far smaller benefit than the New Regime's equivalent.

What happens to my tax if my salary is ₹13 lakh — does crossing ₹12.75L mean I suddenly owe ₹60,000?

No — and this is exactly why marginal relief exists. At ₹13L gross salary, taxable income is ₹12,25,000. The slab calculation gives ₹63,750 in tax. Section 87A rebate does not apply since taxable income exceeds ₹12,00,000. However, marginal relief kicks in: your tax cannot exceed the amount by which your taxable income exceeds ₹12,00,000, which is ₹25,000. So your tax is capped at ₹25,000 plus 4% cess equals ₹26,000. Without marginal relief, the jump from ₹12.75L gross (₹0 tax) to ₹13L gross would impose a ₹66,300 tax bill — a penalty of ₹66,300 for earning ₹25,000 more, which would be perverse and is why the law provides marginal relief to smooth the transition. With marginal relief, the ₹25,000 extra earned at ₹13L effectively costs you ₹26,000 in tax — a marginal rate of over 100% on that specific slice — which is still unpleasant, but far better than the cliff that would exist without relief.

Does Section 87A apply to capital gains from stocks and mutual funds?

Not fully. Section 87A rebate applies only to income taxed at normal slab rates. Long-term capital gains on listed equity shares and equity mutual funds — taxed at a flat 12.5% under Section 112A — are explicitly excluded from the 87A rebate. Short-term capital gains on equity — taxed at 20% under Section 111A — are similarly excluded. This means an investor with ₹9 lakh in salary income and ₹3 lakh in long-term equity gains will find their slab income is ₹9L (within the 87A threshold), but the ₹3L LTCG is taxed at 12.5% without any rebate benefit, giving an LTCG tax of ₹37,500 (after the ₹1.25L annual exemption). Gains from debt funds, gold funds, real estate, and fixed deposits are taxed at slab rates and are eligible for the 87A rebate to the extent that total income including these gains does not exceed ₹12,00,000.

Is Section 87A available to Non-Resident Indians filing Indian tax returns?

No. Section 87A is explicitly available only to resident individuals as defined under Section 6 of the Income Tax Act. An individual is resident in India if they are physically present in India for 182 or more days during the financial year, or 60 or more days during the year and 365 or more days during the preceding four years. NRIs who do not meet these residency criteria pay tax on their India-sourced income — salary earned in India, rental income from Indian property, capital gains on Indian assets — without access to the Section 87A rebate, regardless of income level. NRIs also cannot use the basic exemption limit under the Old Regime for certain types of income. If you are uncertain about your residential status — particularly if you are a seafarer, an employee returning to India mid-year, or someone with split residence — consult a chartered accountant to determine your residential status before filing.