Rebate vs deduction vs exemption
Section 87A provides a rebate on tax payable — it reduces your final income tax (subject to limits), unlike Section 80C which reduces taxable income (in old regime).
Under the [new tax regime](/glossary/new-tax-regime), enhanced rebate rules have made zero-tax outcomes common for middle-income salaried filers — but only when taxable income stays within notified limits and other conditions are met.
Read alongside new regime slabs AY 2026-27 and old vs new regime.
Current framework (AY 2026-27)
Law evolves by Finance Act — for FY 2025-26 / AY 2026-27, the policy direction is:
- [Rebate u/s 87A](/glossary/rebate-u-s-87a) can make tax liability nil for resident individuals with taxable income up to ₹12 lakh under new regime (as widely notified in recent budget cycles)
- Old regime retains its own 87A threshold (historically lower taxable income cap — e.g., ₹5 lakh with ₹12,500 max rebate)
Always confirm exact numbers in the applicable Finance Act before filing — this guide explains mechanics, not legal advice.
Who is eligible?
Typically:
- Resident individual (RNOR/non-resident rules differ)
- Tax computed under new regime
- Taxable income within rebate threshold
- Not subject to special rate income exclusions defined in law for rebate (check schedule for capital gains taxed at special rates — they may still affect computation)
How rebate is calculated (conceptually)
- Compute gross total income from all heads (salary, house property, other sources, etc.)
- Subtract applicable deductions allowed in new regime (e.g., standard deduction, 80CCD(2) employer NPS within limits)
- Arrive at total taxable income
- Apply new regime slab rates → tax on total income
- Subtract 87A rebate (up to amount of tax or statutory max, whichever is lower per rules)
- Add surcharge if applicable, then [4% cess](/glossary/health-education-cess)
Rebate cannot create refund by itself — it reduces tax due to zero at best (excess TDS still yields refund).
Example A: Salaried ₹11 lakh taxable income
Suppose after standard deduction ₹75,000, total taxable income = ₹11,00,000, no other income, new regime.
Compute tax through slabs → suppose pre-rebate tax = ₹X.
If taxable income ≤ ₹12 lakh threshold, 87A may wipe tax to nil (if X within rebate cap per statute).
Employer TDS might still have been deducted — expect refund claim, not "no filing needed." You must file to reconcile.
Example B: ₹12.5 lakh taxable income
Above rebate threshold — partial or no 87A benefit. Small income bump over ₹12 lakh can cause large tax jump (cliff effect) — model before bonus payout timing.
Example C: Salary ₹10 lakh + FD interest ₹1.5 lakh
AIS shows interest you forgot — taxable income rises. Rebate eligibility may disappear — pay attention to AIS review.
Example D: Old regime comparison
Same income with ₹2 lakh Chapter VI-A deductions under old regime:
- Taxable income lower
- But slabs higher; compare net tax after 87A (old) vs new regime 87A
Do not assume new regime wins — compare both.
Form 16 and rebate confusion
Form 16 projects TDS using employer assumptions — may not show rebate explicitly. Your ITR computes rebate at year-end.
Low or zero tax after rebate with TDS deducted → refund — filing still required to claim.
Rebate and special rate income
Long-term capital gains on listed equity, STCG, lottery income, etc., may be taxed at special rates. Law may exclude some special-rate tax from 87A benefit — if you have capital gains, use ITR-2 and careful computation.
Common mistakes
- Ignoring AIS interest — taxable income crosses ₹12 lakh unknowingly
- Assuming rebate means no ITR — filing obligation depends on income/gross totals rules, not just tax due
- Choosing new regime on Form 16 default without comparison when old regime saves more despite rebate
- Double-counting standard deduction — only once on salary
Rebate vs refund
| Term | Meaning |
|---|---|
| 87A rebate | Statutory reduction of tax liability |
| Refund | TDS/advance tax exceeding final liability |
You can have rebate-driven zero tax and refund if TDS was deducted.
Planning tips (compliant)
- Estimate taxable income before March — not tax evasion, timing of voluntary investments or bonus discussions
- Download AIS in June — AIS vs 26AS
- Compare regimes with actual Form 16 — import
We do not guarantee zero tax or maximum rebate — we help you model scenarios.
FAQ
Is ₹12 lakh gross salary tax-free? Not automatically — taxable income after deductions and other income matters. ₹12 lakh gross with additions can exceed rebate limit.
Does 87A apply in old regime? Yes, with different thresholds and max rebate — typically smaller benefit band.
Can I claim 80C and 87A new regime together? 80C generally not allowed in new regime — 87A is separate.
Does rebate affect cess calculation? Cess applies on tax after rebate per statutory order — follow computation sheet in utility.
Marginal relief cliff (conceptual)
When taxable income crosses the rebate threshold by a small amount, tax liability can increase by more than the extra income without marginal relief. Budget speeches sometimes introduce relief — verify in Finance Act text for AY 2026-27. If your income is near ₹12 lakh, model ₹11.9L vs ₹12.1L scenarios before year-end bonuses finalize.
Resident vs non-resident
87A rebate discussion applies to resident individuals as defined in the Income-tax Act. NRIs and RNOR filers follow different rules — ITR form and rebate eligibility differ; this guide targets resident salaried cases.
Interaction with TDS on salary
Employers may deduct TDS monthly without simulating full-year 87A precisely. Result: refund after filing when rebate zeroes tax but TDS was deducted. File to claim — do not skip filing because "rebate means no tax."
Honest product note
Tools can estimate rebate outcomes from your inputs; tax law changes and AIS additions can change results. No software guarantees a specific refund amount — verify on government portal before submit.
Worked comparison table (illustrative)
| Taxable income (₹) | New regime tax (indicative) | 87A may zero? |
|---|---|---|
| 7,00,000 | Low / nil in many cases | Often yes |
| 11,00,000 | Moderate | Often yes under current rules |
| 12,50,000 | Higher slab fill | Typically no full rebate |
Run your exact numbers — table is educational, not personalised advice.
Advance tax interaction
If rebate eliminates tax but you had advance tax instalments from prior year business income, reconciliation differs — salaried-only filers rarely face this; dual-income filers should check advance tax schedule.
Document 87A on computation sheet
After filing, save the tax computation PDF showing 87A rebate applied — useful if employer TDS and rebate interaction confuses refund status later.
Bonus and variable pay impact
March bonuses can push taxable income above rebate threshold even when monthly salary looked safe. If bonus is discretionary, estimate full-year income including bonus before choosing regime mid-year with employer.
Read with old regime article
Old vs new regime remains the decision frame — 87A makes new regime attractive for many, but not all, salaried filers with heavy deductions.
Next steps
Model your FY 2025-26 numbers, verify AIS, pick regime, file before deadline.