How 87A rebase works

The key difference between the two cases is the interest amount. In case 1, the interest amount is Rs.1,00,000, while in Case 2, it is Rs.95,000. This difference affects the total taxable income.

Section 87A Rebate:

The section 87A rebate is a tax rebate available to individual taxpayers whose total taxable income does not exceed Rs.5,00,000. The rebate is calculated as the lower of :

Rs.12,500 (for taxable income upto Rs.5,00,000)

100% of the tax payable

Why 87A Rebate is not applicable in Case 1;

In Case 1, the tax payable is Rs.22,500 + cess, which exceeds the maximum rebate amount of Rs.12,500. Therefore, the 87A rebate is not applicable.

Why 87A Rebate is appliable in case 2:

In Case 2, the tax payable is Rs.20,000, which is less than the maximum rebate amount of Rs.12,500. Since the taxable income is below Rs.5,00,000, the 87A rebate is applicable , and the taxpayer is eligible for a rebate of Rs.2,000.

That is because of maximum marginal relief

In the second scenario, income exceed 7 lacs by Rs.20000/- But tax payable on that works out to Rs.22000/- so the tax payable exceeds income above 7 lacs by 2000.

so 87A restricts the tax payable to the amount by which it exceeds 7 lacs, which is called maximum marginal relief.

Section 87A is a full tax rebate that reduces your tax liability to zero if your income is within the specified limit.

For AY 2026-27:

Under the OLD tax regime:
Total taxable income up to Rs 5 lakh: Rebate equals the tax due, maximum Rs 12,500. Your net tax = 0.
Total income above Rs 5 lakh: No rebate. Full tax at slab rates applies.

Under the NEW tax regime:
Total taxable income up to Rs 12 lakh: Rebate equals the tax due, maximum Rs 60,000. Your net tax = 0. This limit was raised from Rs 7 lakh in Budget 2025.
Total income above Rs 12 lakh: No rebate. Full tax at new regime slab rates.

IMPORTANT EXCEPTION FOR SPECIAL RATE INCOME:
The rebate does NOT apply against tax on income taxed at special rates. This includes:
- LTCG from listed equity shares and equity MFs under Section 112A (taxed at 12.5%): Rebate NOT available
- STCG under Section 111A (taxed at 20%): Rebate NOT available in the new regime

So if your regular income is Rs 10 lakh (below Rs 12 lakh threshold in the new regime) but you also have Rs 3 lakh LTCG from equity MFs, your tax is: 0 on the Rs 10 lakh income (rebate covers it) + Rs 37,500 tax on the Rs 3 lakh LTCG (no rebate on this). Total tax = Rs 37,500.

This is why many people see unexpected tax demand even when their income appears to be within the rebate limit. The ITR portal computes the two components separately.

For detailed calculations including how 87A interacts with a Section 245 income tax notice if the rebate is incorrectly applied, this [Section 245 notice guide](https://taxgarden.in/blog/section-245-income-tax-notice-refund-adjusted-demand-india) explains what happens when the department adjusts your refund against a demand.