87A Rebate in New Tax Regime

Understanding 87A Rebate in New Tax Regime

ByDiksha Chawla

Introduction

The Indian tax landscape has undergone significant changes in recent years, with the introduction of the new tax regime and its subsequent updates. For tax professionals and individual taxpayers alike, understanding these changes is crucial to optimizing tax savings and ensuring compliance. One of the key provisions under the Section 87A rebate in new tax regime, which offers substantial tax relief to eligible taxpayers.

The Indian tax system has evolved significantly over the years, with the introduction of the new tax regime and updates like those in Union Budget 2025. One of the most beneficial provisions for taxpayers, especially those in the lower-income bracket, is the Section 87A rebate. This rebate ensures that individuals with incomes below a specified threshold are not burdened with income tax.

In this blog, we’ll explore what is 87A rebate in income tax, its eligibility criteria, calculation process, and how it impacts taxpayers under the new tax regime. We’ll also discuss the latest updates from Budget 2025, including the increased rebate limit and its implications.

What is Section 87A Rebate?

A tax rebate is a form of tax relief that reduces the total tax liability of an individual. Under Section 87A, this rebate is specifically designed to benefit resident individuals with lower incomes.

For the financial year 2025-26, the rebate limit has been increased to Rs. 60,000 for incomes up to Rs. 12 lakh under the new tax regime. However, this rebate is not applicable for income taxed at special rates.

Key points:

  • Rebate under Section 87A is available for incomes up to Rs. 7 lakh under the new tax regime and Rs. 5 lakh under the old regime for FY 2024-25.
  • The rebate ensures that eligible taxpayers have zero tax liability.

Budget 2025 Update

Income Tax Rebate in Budget 2025 has brought significant changes:

  • For financial year 2025-2026, the rebate allowed for individuals under new tax regime has been raised to Rs. 60,000
  • Rebate is allowed for income up-to Rs. 12 Lakhs in new tax regime
  • Rebate of Rs.60,000 is not applicable for income taxed at special rates
  • Marginal relief on rebate is still applicable. Please read further to understand the concept.

Eligibility Criteria for Section 87A Rebate

To claim the Section 87A rebate, taxpayers must meet the following conditions:

  1. Resident Individual: Only resident individuals are eligible.
  2. Income Threshold:
  • New Tax Regime: Income up to Rs. 7 lakh (FY 2024-25) or Rs. 12 lakh (FY 2025-26).
  • Old Tax Regime: Income up to Rs. 5 lakh.

Special cases:

  • Senior citizens (above 60 years) can also claim the rebate.
  • The rebate is not applicable for non-residents or entities like HUFs or companies.

How to Calculate Section 87A Rebate

Calculating the Section 87A rebate involves the following steps:

  • Calculate your gross total income for the financial year
  • Reduce your tax deductions for tax savings, investments, etc.
  • Arrive at your total income after reducing the tax deductions.
  • Declare your gross income and tax deductions in ITR.
  • Claim a tax rebate under section 87A if your total income does not exceed Rs 7 lakh under the new tax regime & 5 lakh for the old tax regime (shifting out of the default tax regime)
  • The maximum rebate under section 87A for the AY 2025-26 is Rs 25,000 under the new tax regime and Rs 12,500 under the optional tax regime.

Things to Remember while Availing Rebate under Section 87A

  • The rebate can be applied to the total tax before adding a health and education cess of 4%
  • Only resident individuals are eligible to avail rebate under this section.
  • Senior citizens above 60 years and below 80 years of age can avail a rebate under Section 87A
  • The amount of rebate will be lower than the limit specified under Section 87A or total income tax payable (before cess)
  • Section 87A rebate is available under the old and the new tax regime.

Rebate against various tax liabilities

Section 87A rebate can be claimed against tax liabilities on:

  • Normal income which is taxed at the slab rate
  • Long-term capital gains under Section 112 of the Income Tax Act. (Section 112 applies for long-term capital gains on the sale of any capital assets other than listed equity shares as well as equity-oriented schemes of mutual funds)
  • Short-term capital gains on listed equity shares and equity-oriented schemes of mutual funds under Section 111A of the Act, on which tax is payable at a flat rate of 15%.

Note: Rebate under Section 87A cannot be adjusted against tax on long-term capital gains on equity shares and equity-oriented mutual funds (Section 112A).

Key Points to Remember

  • The rebate is applied to the total tax before adding the 4% health and education cess.
  • Only resident individuals are eligible.
  • The rebate is available under both the old and new tax regimes, but the thresholds differ.
  • Marginal relief is available for incomes slightly above the threshold.

Learn more about taxation in our The Indian Tax System: What You Need to Know Blog

FAQs About Section 87A Rebate

1. What is the income limit for claiming the Section 87A rebate?

  • New Tax Regime: Up to Rs. 7 lakh (FY 2024-25) or Rs. 12 lakh (FY 2025-26).
  • Old Tax Regime: Up to Rs. 5 lakh.

2. Can non-residents claim the Section 87A rebate?

No, only resident individuals are eligible.

3. Is the rebate applicable for capital gains?

The rebate can be claimed against normal income and certain capital gains, but not against long-term capital gains on equity shares (Section 112A).

4. How does marginal relief work?

If your income exceeds the threshold, your tax liability will not exceed the amount by which your income exceeds the threshold.

Conclusion

The Section 87A rebate is a valuable provision for taxpayers with lower incomes, ensuring they are not burdened with unnecessary tax liabilities. With the updates in Budget 2025, the rebate limit has been significantly increased, making the new tax regime even more attractive.

Tax professionals and individuals must stay informed about these changes to maximize tax savings and ensure compliance. By understanding what is 87A rebate in income tax and how to claim it, taxpayers can make the most of this provision.

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