Section 87A Tax Rebate Explained: How to Pay Zero Tax Up to ₹7 Lakh / ₹12 Lakh Income
Section 87A is the provision that lets many taxpayers pay zero income tax even though their income falls within a 'taxable' slab. It works by giving a rebate that cancels out your tax liability entirely — up to a threshold. The rebate amount and income limits differ significantly between the old and new tax regimes, and there's a 'marginal relief' twist for incomes just above the threshold. Here's how it all fits together.
What Section 87A Actually Does
Section 87A provides a rebate — a direct reduction in your tax liability (not your income) — for resident individuals whose total income is below a specified threshold. The rebate is applied after computing tax on your total income (as per slab rates) but before adding health and education cess.
New Tax Regime: Rebate Limits
| Total Income | Rebate Under 87A | Effective Tax |
|---|---|---|
| Up to ₹12 lakh | Full tax liability rebated (up to ₹60,000) | ₹0 |
| Slightly above ₹12 lakh | Marginal relief applies | Limited to income above ₹12 lakh |
| Well above ₹12 lakh | No rebate | Full tax as per slabs |
(Note: rebate thresholds under the new regime have been revised over successive Finance Acts — always confirm the applicable limit for the relevant assessment year.)
Old Tax Regime: Rebate Limit
Under the old tax regime, Section 87A provides a rebate of up to ₹12,500 for resident individuals with total income up to ₹5 lakh. If your total income (after all deductions) is ₹5 lakh or below, your tax liability before cess (which would be ₹12,500 on income between ₹2.5 lakh and ₹5 lakh) is fully rebated, bringing your tax to zero.
Marginal Relief: Smoothing the Cliff
Marginal relief ensures that a taxpayer with income just above the 87A threshold doesn't pay disproportionately more tax than someone just below it. Under marginal relief, the additional tax payable is capped at the amount by which your income exceeds the threshold.
Who Cannot Claim 87A?
- Non-resident individuals (NRIs) — the rebate is available only to resident individuals
- Companies, firms, LLPs, AOPs, BOIs — 87A applies only to individuals
- Individuals whose total income includes certain special-rate incomes may have restrictions on how the rebate interacts with that portion (rules vary by regime and have been refined over recent Finance Acts)
87A and STCG/LTCG: Old Regime Nuance
Under the old regime, the Section 87A rebate can, in many interpretations, also offset tax on short-term capital gains taxed under Section 111A (equity STCG) when the total income including such gains is within the ₹5 lakh threshold — though this has been a subject of litigation and CBDT clarification. Under the new regime, special-rate incomes like LTCG under Section 112A are generally excluded from the rebate computation regardless of total income.
Key Takeaway
Section 87A is why many people say "income up to ₹7 lakh / ₹12 lakh is tax-free" — technically, the income IS taxed as per slabs, but the rebate brings the net tax to zero. This is different from a basic exemption limit, and understanding the distinction matters when your income is near the threshold, especially because of how marginal relief and special-rate incomes interact with the rebate.