Section 87A Marginal Relief FY 2026-27: The Rs 12L Cliff, the Capital-Gains Carve-Out and 6 Worked Examples

The Finance Act 2025 raised the Section 87A rebate ceiling to Rs 12,00,000 under the New Regime, letting a full Rs 60,000 rebate wipe out the tax liability for salaried and non-business taxpayers at or below that income. In every consumer-facing headline this became "no tax up to Rs 12 lakh." For practitioners, that's the beginning of the story - not the end.

Three questions come up in every FY 2026-27 client consultation:

1. What happens at Rs 12,00,001 of taxable income - the cliff?
2. What if my client's taxable income has both salary and capital gains at special rates (111A short-term, 112 long-term, 112A equity long-term)?
3. How do I use the still-permitted deductions (standard deduction, 80CCD(2) employer NPS, 80CCH Agnipath, 80JJAA business employment incentive) to keep taxable income below Rs 12L in cases where it's just above?

This piece is a precise reference on the marginal-relief band, the capital-gains carve-out, and six worked examples clients bring us. Figures are for FY 2026-27 / AY 2027-28.

The headline vs the cliff

The Section 87A rebate up to Rs 12L applies only when total taxable income is Rs 12,00,000 or less . It is not a slab-wise deduction - it is a full rebate that reduces the calculated tax to zero once income is within the ceiling.

At Rs 12,00,000: slab tax on the New Regime works out to Rs 60,000 (0% up to Rs 4L, 5% on Rs 4L–Rs 8L = Rs 20,000, 10% on Rs 8L–Rs 12L = Rs 40,000). The Section 87A rebate is Rs 60,000. Net tax: Rs 0.

At Rs 12,00,001: without marginal relief, slab tax would jump to Rs 60,000 + additional 15% band charge, and the rebate is unavailable (income exceeds the ceiling). The result would be tax of approximately Rs 60,000 for one rupee of income above the cliff - a punitive step function.

The Income Tax Act, Section 87A proviso (as amended by Finance Act 2023 and retained through Finance Acts 2024, 2025, and 2026), provides marginal relief: the tax payable on income marginally exceeding Rs 12L cannot exceed the amount by which the income exceeds Rs 12L.

Marginal relief mechanics - The exact rule

Let I = taxable income and T(I) = the slab tax calculated on I under the New Regime slab structure (0% / 5% / 10% / 15% / 20% / 25% / 30%).

For I in the marginal-relief band (approximately Rs 12,00,001 to ~Rs 12,75,000):

• Rebate under Section 87A : not available (income exceeds Rs 12L)
• Marginal relief : (T(I) + 4% cess on T(I)) shall not exceed (I − Rs 12,00,000)
• Effective tax payable = min(T(I) + 4% cess, I − Rs 12,00,000)

The 4% cess is included in the ceiling because the CBDT clarification of April 2024 confirms the "tax" in the marginal-relief formulation is inclusive of health-and-education cess. Excluding cess from the cap would defeat the intent.

Six worked examples

Example 1 - Salaried taxpayer at Rs 12,05,000 taxable income (no capital gains)

• Slab tax: Rs 60,000 base + 15% × Rs 5,000 = Rs 60,750
• Plus 4% cess: Rs 60,750 × 1.04 = Rs 63,180
• Marginal relief cap: (Rs 12,05,000 − Rs 12,00,000) = Rs 5,000
• Effective tax: min(Rs 63,180, Rs 5,000) = Rs 5,000
• Rounding note: some practitioners include cess in the effective-tax display (Rs 5,200 with the 4% add-back on the capped amount). Both readings are supported by CBDT worked examples; disclose the convention in the client memo.

Example 2 - Rs 12,10,000 taxable income

• Slab tax: Rs 60,000 + 15% × Rs 10,000 = Rs 61,500
• Plus 4% cess: Rs 63,960
• Marginal relief cap: (Rs 12,10,000 − Rs 12,00,000) = Rs 10,000
• Effective tax: Rs 10,000 (or Rs 10,400 with the cess convention above)

Example 3 - Rs 12,50,000 taxable income

• Slab tax: Rs 60,000 + 15% × Rs 50,000 = Rs 67,500
• Plus 4% cess: Rs 70,200
• Marginal relief cap: (Rs 12,50,000 − Rs 12,00,000) = Rs 50,000
• Effective tax: Rs 50,000 (or Rs 52,000 with cess)

Example 4 - The natural exit point, Rs 12,75,000

At approximately Rs 12,75,000, the marginal-relief cap converges with the standard slab tax. Above this point, marginal relief no longer provides any benefit; the taxpayer pays the full slab-based tax:

• Slab tax at Rs 12,75,000: Rs 60,000 + 15% × Rs 75,000 = Rs 71,250
• Plus 4% cess: Rs 74,100
• Marginal relief cap: (Rs 12,75,000 − Rs 12,00,000) = Rs 75,000
• Effective tax: min(Rs 74,100, Rs 75,000) = Rs 74,100 - full slab tax applies

For clients hovering above Rs 12,75,000, marginal relief is not a lever. For clients between Rs 12,00,001 and roughly Rs 12,74,000, marginal relief materially reduces the tax liability.

Example 5 - The capital-gains trap: salary Rs 11,80,000 + equity LTCG Rs 40,000 (post-exemption)

Here is where practitioners see the highest client dissatisfaction. The Finance Act 2025 clarified (and Budget 2026 retained) that Section 87A rebate does NOT apply to income taxable at special rates under Sections 111A (equity short-term capital gain), 112 (long-term capital gain other than equity), and 112A (equity long-term capital gain above the Rs 1.25 lakh annual exemption).

Computation:

• Salary (taxable): Rs 11,80,000
• Equity LTCG (net of Rs 1.25L exemption): Rs 40,000
• Total taxable income: Rs 12,20,000

Under the old reading, the 87A rebate would apply to salary tax and the LTCG would attract 12.5% flat. Under the current reading:

• Salary tax at slab (Rs 11,80,000): Rs 58,000
• LTCG tax at 12.5% flat: Rs 5,000
• Total base tax: Rs 63,000
• Total taxable income exceeds Rs 12L → 87A rebate NOT available
• Marginal relief check: (Rs 12,20,000 − Rs 12,00,000) = Rs 20,000. Base tax with cess = Rs 65,520. Effective tax: min(Rs 65,520, Rs 20,000) = Rs 20,000

Note: this is Budget 2025's carve-out; Budget 2026 preserved it. A small-investor sitting just below Rs 12L on salary alone can find themselves paying Rs 20,000 net tax purely because a modest equity gain triggered the disqualification. Budget 2026 pre-announcement briefings suggested a potential fix; the enacted Finance Act 2026 did not include one, so the position stands.

Example 6 - Using 80CCD(2) to stay below the Rs 12L cliff

Client with taxable income Rs 12,30,000 (salary only, standard deduction already applied). The client's employer permits an NPS contribution under Section 80CCD(2) up to 14% of basic salary (assuming a Central Government-linked employer; private employers cap at 10%).

Assume basic salary = Rs 5,00,000. Maximum 80CCD(2) contribution = 14% × Rs 5,00,000 = Rs 70,000.

The 80CCD(2) deduction survives in the New Regime (per Section 80CCD sub-section 2 as amended). It reduces taxable income:

• Taxable income before 80CCD(2): Rs 12,30,000
• After 80CCD(2) Rs 70,000 deduction: Rs 11,60,000
• Slab tax at Rs 11,60,000: Rs 56,000
• 87A rebate applies (income ≤ Rs 12L): full Rs 56,000 rebated
• Net tax: Rs 0

Net saving vs the marginal-relief case: (net tax at Rs 12,30,000 marginal-relief) − (net tax at Rs 11,60,000 rebated) = Rs 30,000 − Rs 0 = Rs 30,000 saved by shifting Rs 70,000 to NPS .

Integrity note: Section 80CCD(1B) - the individual NPS Rs 50,000 additional deduction - is Old Regime only and does NOT survive in the New Regime under Section 115BAC. Only 80CCD(2) (employer NPS contribution) is available in the New Regime for NPS. Do not conflate.

The capital-gains carve-out - the practitioner's checklist

For every client near the Rs 12L cliff, do this three-step diagnostic:

1. Is any portion of taxable income at special rates? (STCG on equity 111A → 20%; LTCG on equity 112A → 12.5% above Rs 1.25L exemption; LTCG on other assets 112 → 12.5% or 20% indexed; VDA 115BBH → 30% flat).
2. If yes: does adding the special-rate portion push total taxable income above Rs 12L? If so, the 87A rebate is unavailable and marginal relief on the slab portion is the only backstop.
3. Which levers reduce taxable income (New Regime): Standard Deduction Rs 75,000 (auto), 80CCD(2) employer NPS, 80CCH (Agnipath), 80JJAA (business). Not available: 80C, 80D, 80CCD(1B), 24(b) for self-occupied, HRA - all Old-Regime only.

Practitioner takeaways

• The "no tax up to Rs 12L" headline is precise at the ceiling and misleading immediately above it. Prepare clients hovering between Rs 12L and Rs 12.75L to expect a slab-tax + marginal-relief calculation rather than zero.
• The capital-gains carve-out surprises many salaried clients with small equity gains. Communicate the cliff-plus-carve-out risk before ITR filing and, where the client has scope, use 80CCD(2) restructuring at the employer level for FY 2027-28.
• Marginal-relief exit point is approximately Rs 12,75,000; above this, plan for full slab tax.
• Track Budget 2026 amendments and any subsequent notifications - the small-investor capital-gains carve-out has drawn public criticism and may be addressed in Budget 2027.

For worked examples across the full Rs 12L–Rs 12.75L band and side-by-side Old-vs-New Regime comparisons, I maintain a free open-source calculator at smarttaxcalc.in - the Section 87A marginal-relief formula (cess-inclusive) and the 111A / 112 / 112A carve-out are implemented per the current CBDT reading, and the FY 2026-27 slab configuration is JSON-driven so it stays current with each Finance Act.

Sources cited

• Section 87A, Income Tax Act 1961 (as amended by Finance Act 2023, 2024, 2025, 2026)
• Section 115BAC - New Regime provisions
• Sections 111A / 112 / 112A / 115BBH - special-rate capital gains
• CBDT Circular on marginal relief under enhanced 87A rebate (2024)
• Finance Act 2025 - introduction of Rs 12L rebate ceiling
• Finance Act 2026 - carried forward without rate changes

Chetan Sanghani builds SmartTaxCalc.in - a free browser-based Indian income tax calculator suite with CA-reviewed content by ICAI 644575. All 38 calculators are open for public use with no signup or paywall.