Income Tax Rebate Rules For FY 2025-26 (AY 2026-27)

As the 2026 Budget session approaches, taxpayers are closely evaluating the current tax landscape for Financial Year (FY) 2025-26 (Assessment Year 2026-27). The primary tool for middle-income earners to eliminate their tax liability is the rebate under Section 87A.

The Power of Section 87A: Making Tax Zero

Section 87A is not a deduction that reduces your taxable income; rather, it is a tax credit that is applied directly to your final tax bill. If your total taxable income stays within the prescribed limits, the government provides a rebate that can bring your tax liability down to zero.

Rebate Comparison for FY 2025-26

Who Qualifies for the Rebate?

To claim the benefit of Section 87A, taxpayers must meet specific criteria:

• Resident Individuals Only: The rebate is exclusively for resident individuals. It is not available to Non-Resident Indians (NRIs), Hindu Undivided Families (HUFs), or corporate entities.
• Income Thresholds: Under the New Tax Regime, the threshold is significantly higher at Rs 12 lakh. Under the Old Tax Regime, it remains at Rs 5 lakh.
• Normal vs. Special Rates: The rebate primarily applies to income taxed at standard slab rates. Income taxed at special rates such as short-term capital gains (STCG) or certain windfall gains, may still attract tax even if your total income is below the threshold.

Expert Expectations for Budget 2026

As the budget approaches, tax experts have highlighted several areas for potential improvement:

1. Marginal Relief/Tapering: Currently, crossing the limit by even a small amount (e.g., earning ₹12,00,010 in the new regime) can lead to a sudden and disproportionately high tax outgo. Experts suggest a gradual tapering mechanism to make the transition more equitable.
2. Increased Limits: There is a general expectation that the government might further increase the income threshold for the rebate to provide relief to more middle-income earners.
3. Extension to Special Rates: Experts hope the rebate benefit will be extended to cover incomes taxed at special rates, such as short-term capital gains.
4. Uniformity: Calls for greater clarity and uniformity in how Section 87A is applied across different types of income.

Conclusion

For FY 2025-26, the New Tax Regime remains highly attractive for those earning up to Rs 12 lakh, offering a path to zero tax without the need for complex investment proofs. However, as Budget 2026 nears, all eyes are on the Finance Ministry to see if they will address the "marginal income" issues and potentially expand these benefits to a wider segment of the population.

Source: Media News

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