87A Rebate For AY 2026-27: Stop Overpaying Income Tax By Using These Steps

If you're filing your income tax return for AY 2026-27, the Section 87A rebate is one of the most important provisions to understand - it can bring your tax liability down to zero even if you earn up to ₹12 lakh a year. Budget 2025 significantly expanded this benefit under the new tax regime, and the rules around what income qualifies have also gotten more specific. 

The rebate is deducted before the 4% Health and Education Cess is applied, and it cannot exceed the amount of tax you actually owe.

Under the new Income Tax Act, 2025 (applicable from Tax Year 2026-27 onward), the same provision is renumbered as Clause 156, though the substance of the benefit is unchanged. Most taxpayers and professionals will continue to refer to it as the "Section 87A rebate" for AY 2026-27 since that return is still governed by the 1961 Act. 

Key Takeaways

• The 87A rebate can bring tax to zero for income up to ₹12 lakh (new regime) or ₹5 lakh (old regime) in AY 2026-27.
• Salaried individuals effectively get zero tax up to ₹12.75 lakh due to the standard deduction.
• Capital gains taxed at special rates may not qualify for the rebate under the new regime — check both regimes if you have such income.
• No separate claim process is needed; it's applied automatically during ITR filing.
• NRIs, HUFs, firms, and companies cannot claim this rebate under any circumstances.

Section 87A Rebate Limits for AY 2026-27 (FY 2025-26)

This is a major jump from earlier years. For context, the new regime rebate threshold was just ₹7 lakh (with a maximum rebate of ₹25,000) up to FY 2024-25. Budget 2025 nearly doubled the threshold and more than doubled the rebate amount.

How the Rebate Has Evolved?

• FY 2019-20 to FY 2022-23: Old regime rebate of ₹12,500 for income up to ₹5 lakh.
• FY 2023-24 (new regime introduced as default): ₹25,000 rebate for income up to ₹7 lakh under new regime.
• FY 2025-26 (AY 2026-27) onward: ₹60,000 rebate for income up to ₹12 lakh under new regime.

Who Is Eligible to Claim the 87A Rebate?

To claim the rebate under Section 87A for AY 2026-27, you must meet all of the following conditions:

• You must be a resident individual of India as per Section 6 of the Income Tax Act.
• Your total taxable income (after all eligible deductions) must not exceed ₹5,00,000 (old regime) or ₹12,00,000 (new regime).
• The rebate applies only to individuals - HUFs, firms, LLPs, and companies cannot claim it.
• Both regular senior citizens (60–79 years) and super senior citizens (80+ years) can claim the rebate if otherwise eligible.

Who Cannot Claim It?

• Non-Resident Indians (NRIs), regardless of income level
• Hindu Undivided Families (HUFs)
• Firms, LLPs, Associations of Persons (AOPs), Bodies of Individuals (BOIs), and companies

Important: Rebate Is Not Available on All Income Types

This is a detail many taxpayers miss - and one that has caused real confusion in ITR filing utilities.

• Under the new tax regime, the 87A rebate generally cannot be claimed against tax on income taxed at special rates, such as:
• Short-term capital gains on listed equity shares/equity mutual funds under Section 111A.
• Long-term capital gains under Section 112A
• In practice, this means if your total income includes such gains and your slab-rate income alone exceeds the threshold, the rebate may not apply to the portion taxed at special rates - even if your overall income is within ₹12 lakh. Under the old tax regime, the position is more taxpayer-friendly:
• the ₹12,500 rebate can still apply even if total income (including such special-rate gains) stays within ₹5 lakh. If your income includes capital gains, it's worth running the calculation under both regimes before deciding which to opt for.

Marginal Relief Under Section 87A

Marginal relief prevents a sharp jump in tax liability when your income crosses the rebate threshold by a small amount. Without this relief, someone earning just ₹100 more than the rebate limit could suddenly owe thousands of rupees in tax.

Example:

Suppose your taxable income under the new regime is ₹12,10,000 - just ₹10,000 above the ₹12 lakh threshold. Without marginal relief, you'd lose the entire ₹60,000 rebate and owe tax on the full amount. Marginal relief ensures your additional tax liability is capped at the amount by which your income exceeds ₹12 lakh (i.e., ₹10,000 in this case), rather than the full tax computed on slab rates.

How to Claim the Section 87A Rebate: Step-by-Step

There's no separate form or application - the rebate is built into the ITR filing process. Here's how it works:

1. Compute your Gross Total Income from all heads of income (salary, house property, business/profession, capital gains, other sources)
2. Claim eligible deductions (Section 80C to 80U) if filing under the old regime — these are largely not available under the new regime
3. Arrive at your Total Taxable Income after deductions
4. Calculate tax payable as per the applicable slab rates for your chosen regime
5. Check eligibility - if taxable income is within ₹12 lakh (new regime) or ₹5 lakh (old regime), the rebate applies automatically
6. File your ITR - most e-filing utilities and portals (including the Income Tax Department's own portal) auto-calculate and apply the rebate once your income details are entered correctly.

Since the rebate depends heavily on how special-rate income is treated, it's worth double-checking the computed rebate in your ITR draft before final submission, particularly if you have capital gains.

FAQs

What is the Section 87A rebate limit for AY 2026-27?

For AY 2026-27 (FY 2025-26), resident individuals under the new tax regime can claim a rebate of up to ₹60,000 if taxable income does not exceed ₹12 lakh. Under the old tax regime, the rebate remains up to ₹12,500 for taxable income up to ₹5 lakh.

Can I claim the 87A rebate on capital gains income?

Under the new tax regime, the rebate is generally not available on income taxed at special rates, such as short-term capital gains under Section 111A or long-term capital gains under Section 112A. Under the old tax regime, the rebate can still apply if total income including such gains stays within ₹5 lakh.

Is Section 87A rebate available to NRIs?

No. The rebate is available only to resident individuals as defined under Section 6 of the Income Tax Act. NRIs cannot claim this rebate regardless of income level.

What is the effective tax-free income limit for salaried employees in AY 2026-27?

Salaried individuals opting for the new tax regime can have zero tax liability on income up to ₹12.75 lakh, combining the ₹12 lakh rebate threshold with the ₹75,000 standard deduction.

Do I need to apply separately to claim the 87A rebate?

No. The rebate is automatically computed and applied when you file your ITR for AY 2026-27, provided your taxable income falls within the eligible limit for your chosen regime.