Last reviewed: 17 August 2026. The Section 87A rebate is the reason "income up to ₹12 lakh is tax-free" made every headline after Budget 2025 — and it is also the provision most misunderstood in this year's filing season. With the ITR-3 and ITR-4 due date now 31 August 2026, taxpayers with even a small amount of capital gains are discovering that the rebate does not work the way they assumed. Here is exactly how the ₹60,000 rebate operates for AY 2026-27, where it stops, and the worked numbers behind it.
The rebate framework for AY 2026-27
Section 87A gives a resident individual a deduction from tax (not from income). The Finance Act, 2025 reset the new-regime numbers with effect from AY 2026-27 (FY 2025-26):
| Particulars | New regime (Sec 115BAC) | Old regime |
|---|---|---|
| Total income ceiling for rebate | ₹12,00,000 | ₹5,00,000 |
| Maximum rebate | ₹60,000 | ₹12,500 |
| Who can claim | Resident individuals only — not NRIs, HUFs, firms or companies | |
| Applies against special-rate tax (111A/112A)? | No — restricted to slab-rate tax by the Finance Act, 2025 proviso | 111A: yes · 112A: no (barred by Sec 112A(6)) |
| Marginal relief | Yes, up to ₹12,70,588 | No |
The new-regime slabs the rebate sits on: nil up to ₹4 lakh, 5% for ₹4–8 lakh, 10% for ₹8–12 lakh, 15% for ₹12–16 lakh, 20% for ₹16–20 lakh, 25% for ₹20–24 lakh and 30% above ₹24 lakh. Tax on exactly ₹12 lakh of slab income is ₹60,000 — which is precisely why the maximum rebate is ₹60,000. Our old vs new regime break-even guide covers regime choice in detail.
Worked example 1 — pure salary, rebate does its job
Resident, new regime, total income ₹9,00,000 after standard deduction. Tax: ₹20,000 (5% on ₹4–8 lakh) + ₹10,000 (10% on ₹8–9 lakh) = ₹30,000. Rebate under 87A = ₹30,000 (capped at actual tax). Tax payable: nil. The same logic makes gross salary up to ₹12,75,000 tax-free — ₹75,000 standard deduction brings total income to ₹12,00,000, slab tax of ₹60,000 is fully absorbed by the rebate.
Worked example 2 — the STCG situation everyone is hitting this year
Resident, new regime: salary income ₹3,00,000 plus ₹2,00,000 short-term capital gains on listed equity (Section 111A, taxed at 20% for transfers on or after 23 July 2024).
- Slab-rate income ₹3,00,000 is below the ₹4 lakh basic exemption — slab tax nil, and the unused ₹1,00,000 of basic exemption is set off against the STCG (allowed for residents).
- Taxable STCG = ₹1,00,000 × 20% = ₹20,000, plus 4% cess = ₹20,800 payable.
- Total income ₹5,00,000 is well under ₹12 lakh — yet the rebate cannot touch the ₹20,000 because the Finance Act, 2025 proviso limits the rebate to "income-tax payable as per the rates provided in sub-section (1A) of section 115BAC", i.e. slab-rate tax only.
The same restriction applies to LTCG under Section 112A (12.5% beyond the ₹1.25 lakh exemption) — and for 112A the bar is even older: Section 112A(6) has always excluded the 87A rebate, in both regimes. For how the gains themselves are computed, see our capital gains on shares and mutual funds guide.
How this played out in earlier years (and why AY 2026-27 is different)
For AY 2024-25 and AY 2025-26 the statute was silent, the e-filing utility started blocking the claim from 5 July 2024, and litigation followed — with courts directing the department to at least allow taxpayers to make the claim, and ITAT benches ruling both ways. Many taxpayers who claimed the rebate against STCG received Section 143(1) adjustment intimations. The Finance Act, 2025 ended the debate prospectively: from AY 2026-27 the new-regime rebate is expressly confined to slab-rate tax. If you have an open dispute for an earlier year, it is a live legal position worth defending on facts; for the current return, the claim should simply not be made.
Marginal relief — the ₹12,00,001 problem, solved with numbers
Without relief, earning ₹1 more than ₹12 lakh would cost ₹60,000+ in tax. Marginal relief caps the tax at the amount by which slab income exceeds ₹12,00,000, until normal slab tax becomes the lower figure at ₹12,70,588:
| Slab-rate total income | Normal slab tax | Tax with marginal relief (before cess) |
|---|---|---|
| ₹12,10,000 | ₹61,500 | ₹10,000 |
| ₹12,40,000 | ₹66,000 | ₹40,000 |
| ₹12,70,588 | ₹70,588 | ₹70,588 (break-even) |
| ₹13,00,000 | ₹75,000 | Not applicable — normal tax applies |
Remember: marginal relief, like the rebate, works only on slab-rate income. Capital gains at special rates neither get the relief nor push you out of it — they sit in their own bucket.
Common mistakes to check before you file
- Assuming "below ₹12 lakh = nil tax" with capital gains in the mix. Run the two-bucket computation first: slab income vs 111A/112A income.
- Claiming the rebate as an NRI. Section 87A is for residents only — a common error in NRI returns with small Indian incomes.
- Old-regime filers forgetting the ₹5 lakh cliff. At ₹5,00,001 the entire ₹12,500 rebate disappears; there is no marginal relief in the old regime.
- Repeating an earlier year's STCG rebate claim. The utility will compute tax without it; a mismatch invites a 143(1) adjustment. See our ITR last-date and belated return guide for what happens after 31 August.
- Ignoring the cess. The 4% health and education cess applies on tax after the rebate — nil tax means nil cess, but ₹20,000 of surviving STCG tax carries ₹800 of cess.
Frequently asked questions
Who can claim the Section 87A rebate of ₹60,000 for AY 2026-27?
Only a resident individual who opts for the new tax regime and whose total income chargeable at slab rates does not exceed ₹12,00,000. NRIs, HUFs, firms and companies cannot claim it. Under the old regime the limit is ₹5,00,000 with a maximum rebate of ₹12,500.
Is income up to ₹12.75 lakh really tax-free for salaried taxpayers?
Yes, where the income is salary taxed at slab rates under the new regime: the ₹75,000 standard deduction brings ₹12,75,000 of gross salary down to ₹12,00,000 of total income, and the ₹60,000 rebate wipes out the slab tax. If part of the income is short-term or long-term capital gains taxed at special rates, tax can still be payable.
Can I set off the 87A rebate against tax on STCG from shares or equity mutual funds?
Not under the new regime for AY 2026-27. The Finance Act, 2025 proviso restricts the rebate to tax computed at the Section 115BAC(1A) slab rates, so the flat 20% tax on Section 111A STCG remains payable. Under the old regime, the ₹12,500 rebate can still be applied against Section 111A tax. Rebate against LTCG under Section 112A is barred in both regimes by Section 112A(6).
My total income is below ₹12 lakh — is zero tax guaranteed?
No. The outcome depends on your residential status, the regime you opt for, and the composition of your income. A resident with ₹11 lakh of salary pays nil, but the same person with ₹9 lakh salary and ₹2 lakh of listed-share STCG still pays 20% on the taxable STCG because the rebate cannot absorb special-rate tax.
What is marginal relief and up to what income does it apply?
If slab income slightly exceeds ₹12 lakh, tax is capped at the amount by which income exceeds ₹12 lakh. The benefit tapers to nil at ₹12,70,588 — beyond that, normal slab tax is lower and applies. Marginal relief works only on slab-rate income, never on STCG or LTCG.
I claimed 87A against STCG in an earlier year — what should I do now?
For AY 2024-25 and AY 2025-26 the issue was genuinely disputed — the utility disallowed it from 5 July 2024, while courts and some ITAT benches took the taxpayer's side. Many such claims received Section 143(1) adjustments. From AY 2026-27 the statute is explicit, so do not repeat the claim; for earlier years, respond to any intimation on the merits of the law as it stood then, ideally with professional advice.
If your return mixes salary, capital gains and the rebate, a pre-filing computation check costs far less than an intimation later. Our team handles regime selection, capital-gains workings and 143(1) responses end to end.
Income Tax Filing Notice Management Talk to usThis article is a general summary of Section 87A as amended by the Finance Act, 2025 for AY 2026-27, based on the law as on 17 August 2026. It is not professional advice for any specific case; positions for earlier assessment years remain subject to pending litigation. Please consult a qualified professional before acting.