Income Tax

Section 87A Tax Rebate Explained: How to Pay Zero Tax Up to ₹12 Lakh Income

CA Nikhil Gupta·June 2026·7 min readREBATE GUIDE

Reviewed by CA Nikhil Gupta · Last reviewed 17 June 2026

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.

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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.

⚠ It's a cliff, not a slab benefit (without marginal relief): If your income is ₹5,00,001 under the old regime and marginal relief didn't exist, your entire income would become taxable normally — making you liable for tax on the full amount, not just the ₹1 excess. Marginal relief (explained below) prevents this unfair jump.

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.

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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.

Frequently Asked Questions

If my income is exactly at the Section 87A threshold, is my tax really zero? ▼

Yes — if your total taxable income (after all applicable deductions) is at or below the rebate threshold for your chosen regime (₹5 lakh under the old regime, or the higher threshold under the new regime as per the applicable Finance Act), the tax computed on your income as per slab rates is fully offset by the Section 87A rebate, bringing your tax liability before cess to zero. You would owe ₹0 in income tax (cess is also nil since it's calculated on the post-rebate tax).

What happens if my income is just ₹1 above the Section 87A threshold? ▼

Without marginal relief, crossing the threshold by even ₹1 could make your entire income taxable as per normal slabs — resulting in a tax liability far larger than ₹1. To prevent this unfair outcome, marginal relief caps your additional tax liability at the amount by which your income exceeds the threshold. So if your income is ₹1 above the limit, your tax liability (after marginal relief) would also be approximately ₹1 — not the full slab-based tax.

Can NRIs claim the Section 87A rebate? ▼

No. Section 87A explicitly applies only to 'resident individuals' as defined under the Income Tax Act. Non-resident Indians (NRIs), even if their Indian-sourced taxable income falls below the rebate threshold, cannot claim this rebate and will be taxed as per the applicable slab rates on their total income without any 87A benefit.

Source and review trail

Use the current official instrument, portal or regulator publication before acting.

Primary category: Income Tax
Official starting point: www.incometax.gov.in

Primary sources & related provisions

Statutory provisions referenced in this guide:

Section 11 (Incomes not included in total income; earlier Section 10) - Income-tax Act