Section 87A Rebate Rule Correction: No Income Tax Up to Rs 12.75 Lakh for Salaried Individuals

Introduction

Do you earn a salary and wonder how much tax you really need to pay under the new tax regime? The Tax Rebate U/s 87A in the New Tax Regimes as per the Budget 2025 has brought relief for millions of salaried individuals. With this rule correction, those earning up to Rs 12.75 lakh can now avoid paying income tax-except when their income includes certain special categories like short-term capital gains (STCG).

Think of it like this: You're on a toll-free road until Rs 12.75 lakh, but if you take a side lane like STCG, you'll face a toll no matter what. This article will explain the changes, highlight the correction made in Section 87A, and guide you step by step on how it impacts you.

Table of Contents

1. Understanding Section 87A Rebate in the New Tax Regime

Section 87A allows individual taxpayers with income below a certain threshold to claim a rebate, reducing their tax liability to zero. Under the new tax regime, this limit has been set at Rs 12.75 lakh as per the Budget 2025. In simple words, if your salary income (after deductions) is below this limit, you won't pay income tax.

2. What Changed in Budget 2025?

The Finance Minister, in Budget 2025, announced a crucial amendment to Section 87A. Earlier, the threshold was lower, but now it has been expanded to Rs 12.75 lakh. This move provides significant relief to salaried employees, especially in times of rising living costs.

3. The Mistake in Income Tax Act Drafting

Here's where things got confusing. Initially, the Income Tax Act (1961) carried an error in Section 115BAC(1A)(iii). Due to this drafting mistake, taxpayers could only claim Rs 50,000 as standard deduction instead of the newly announced Rs 75,000. This meant many salaried employees ended up facing unexpected tax liability despite the promise of relief.

4. How the Government Corrected the Drafting Error

In August 2025, the government amended the Income Tax Act to correct this mistake. After the correction, taxpayers can now claim the enhanced standard deduction of Rs 75,000. This change ensures that salaried individuals genuinely enjoy the full rebate under Section 87A.

5. Standard Deduction of Rs 75,000: What It Means for You

A standard deduction is like an automatic discount on your taxable income. With Rs 75,000 as the standard deduction, your taxable salary automatically reduces. So, if you earn Rs 13.5 lakh, after applying this deduction and Section 87A rebate, your tax liability might still drop to zero if your net income is under Rs 12.75 lakh.

6. Who Benefits from Section 87A Rebate?

This rebate primarily benefits salaried individuals under the new tax regime. If your income is up to Rs 12.75 lakh, you don't have to pay income tax. However, remember that this doesn't apply if your income includes special categories like capital gains.

7. Why Short-Term Capital Gains (STCG) Are Excluded

Many taxpayers wonder, Why doesn't Section 87A cover STCG? The reason is simple: STCG is taxed at a special rate of 15% under Section 111A. This means even if your salary qualifies for the rebate, your STCG won't. For example, if you earn Rs 12 lakh as salary and Rs 2 lakh as STCG, the rebate won't reduce your STCG tax liability.

8. Practical Example: Tax Calculation with Section 87A

Imagine you earn Rs 12.6 lakh as salary income. After subtracting Rs 75,000 as standard deduction, your taxable income becomes Rs 11.85 lakh. Since this is under Rs 12.75 lakh, your tax liability becomes zero under Section 87A. But if you also earn Rs 1 lakh as STCG, that amount will be taxed separately at 15%.

9. Old Tax Regime vs. New Tax Regime: Which Is Better?

While the old regime allows deductions for investments like PF, LIC, and housing loans, the new regime offers lower slab rates and a Section 87A rebate. For many salaried employees without major investments, the new tax regime with Section 87A rebate proves more beneficial.

10. The Role of Transition Words in Understanding Tax Rules

Transition words like therefore, however, moreover, in short, and as a result make tax rules easier to follow. Just like traffic signs guide you on the road, these words guide readers through complex topics, helping them understand the flow step by step.

11. Salaried Employees: The Biggest Beneficiaries

The correction in Section 87A and enhancement of the standard deduction directly benefit salaried employees. They form the majority of middle-class taxpayers who often lack complicated tax planning. For them, the relief is immediate and meaningful.

12. How Section 87A Encourages Middle-Class Growth

By reducing tax burdens, Section 87A puts more disposable income in people's hands. This encourages spending, savings, and investment-fueling middle-class growth. Think of it as watering a plant: the more nourishment you give, the stronger it grows.

13. Common Misconceptions About Section 87A

Some believe Section 87A applies to all income types, which is incorrect. Others think they can claim it under both regimes, which is also false. The rebate only applies in the new tax regime and not to special incomes like STCG or lottery winnings.

14. Future Expectations: Will the Rebate Limit Increase?

Taxpayers are hopeful that the government may further raise the rebate limit in future budgets. Considering inflation and rising expenses, experts expect that the threshold might cross Rs 13 lakh in the coming years.

15. Conclusion: What Should You Do Next?

The Tax Rebate U/s 87A in the New Tax Regimes as per the Budget 2025 is a big win for salaried individuals. If your income is below Rs 12.75 lakh (excluding special income like STCG), you won't pay income tax. However, always check whether your income contains components that don't qualify for the rebate. In short, stay updated, plan smartly, and make the most of this relief.

FAQs

1. What is the Tax Rebate U/s 87A in the New Tax Regimes as per the Budget 2025?

It is a rebate that reduces the tax liability to zero for individuals earning up to Rs 12.75 lakh, provided the income is from salary and not special categories.

2. Does Section 87A rebate apply to short-term capital gains (STCG)?

No. STCG is taxed at a flat 15% and does not qualify for the Section 87A rebate.

3. Who can claim the Section 87A rebate?

Resident individual taxpayers with taxable income below Rs 12.75 lakh under the new regime can claim it.

4. Can I claim both the standard deduction and the Section 87A rebate?

Yes. You can first reduce your income with the Rs 75,000 standard deduction and then apply the Section 87A rebate if your taxable income falls below the threshold.

5. Which tax regime is better: old or new?

It depends on your financial profile. If you have fewer investments, the new regime with the Section 87A rebate may be better. If you claim multiple deductions, the old regime might work in your favour.