Budget 2025 brought the headline that income up to ₹12 lakh is now tax-free. The mechanism behind that headline is Section 87A — a rebate that wipes out the slab tax on income below a threshold. Understanding how it works, and what happens just above the threshold, determines whether you are actually inside the zero-tax zone or unexpectedly outside it.
What Section 87A does
Section 87A is a rebate, not a deduction. The distinction matters:
- A deduction (like 80C) reduces taxable income before slabs are applied.
- A rebate (87A) reduces the tax after slabs have been applied to taxable income.
The effect is the same — less tax paid — but the sequence means a rebate can zero out the entire slab-tax bill in one step, even when the slab computation would have produced a large number.
The mechanism, step by step:
- Compute taxable income as normal (gross income minus standard deduction and any applicable deductions).
- Apply the progressive slab table to get slab tax.
- If taxable income is at or below the rebate threshold, the rebate cancels the slab tax (up to the maximum rebate amount for the regime).
- Cess is computed on the remaining tax after the rebate — if the rebate fully cancels the slab tax, cess is also ₹0.
Old regime: the ₹5 lakh rebate
Under the old regime, Section 87A gives a rebate of up to ₹12,500 if taxable income does not exceed ₹5,00,000.
Worked example: Gross salary ₹5.5 lakh, old regime, salaried, below 60, FY 2025-26.
| Step | Amount |
|---|---|
| Gross salary | ₹5,50,000 |
| Less: standard deduction | − ₹50,000 |
| Taxable income | ₹5,00,000 |
| Slab tax: 5% × ₹2,50,000 | ₹12,500 |
| Section 87A rebate (₹5L ≤ ₹5L — full rebate) | − ₹12,500 |
| Tax after rebate | ₹0 |
| Cess @ 4% of ₹0 | ₹0 |
| Total tax payable | ₹0 |
A gross salary of ₹5.5 lakh pays nothing. Now watch what happens at ₹5.6 lakh:
| Step | Amount |
|---|---|
| Gross salary | ₹5,60,000 |
| Less: standard deduction | − ₹50,000 |
| Taxable income | ₹5,10,000 |
| Slab tax: 5% × ₹2,50,000 + 20% × ₹10,000 | ₹14,500 |
| Section 87A rebate (₹5.1L > ₹5L — no rebate) | ₹0 |
| Cess @ 4% of ₹14,500 | ₹580 |
| Total tax payable | ₹15,080 |
The old regime has no marginal relief at the ₹5 lakh threshold. A ₹10,000 salary increase — from ₹5.5L to ₹5.6L — triggers ₹15,080 in tax: a tax cost that dwarfs the extra income. This hard cliff is one of the structural differences between the two regimes.
New regime FY 2025-26: the ₹12 lakh rebate
Under the new regime for FY 2025-26 (Budget 2025), Section 87A gives a rebate of up to ₹60,000 if taxable income does not exceed ₹12,00,000.
Worked example: Gross salary ₹12.75 lakh, new regime, salaried, below 60, FY 2025-26.
| Step | Amount |
|---|---|
| Gross salary | ₹12,75,000 |
| Less: standard deduction | − ₹75,000 |
| Taxable income | ₹12,00,000 |
| Slab tax: 0% × ₹4L + 5% × ₹4L + 10% × ₹4L | ₹60,000 |
| Section 87A rebate (₹12L ≤ ₹12L — full rebate) | − ₹60,000 |
| Tax after rebate | ₹0 |
| Cess @ 4% of ₹0 | ₹0 |
| Total tax payable | ₹0 |
A gross salary of ₹12.75 lakh pays zero tax under the new regime for FY 2025-26. This is why “₹12.75 lakh is tax-free” is the practical shorthand for salaried employees — the ₹75,000 standard deduction is doing the work of bridging from ₹12L taxable to ₹12.75L gross.
Marginal relief: the new regime’s cliff protection
Unlike the old regime, the new regime builds marginal relief into Section 87A above the ₹12 lakh threshold. Marginal relief ensures that if taxable income is just above ₹12L, the total tax cannot exceed the amount by which income exceeds ₹12 lakh.
The rule: Once taxable income exceeds ₹12L (so the standard rebate is lost), the slab tax is capped at (taxable income − ₹12,00,000) as long as slab tax would otherwise exceed that difference.
| Taxable income | Slab tax | Excess over ₹12L | Tax after marginal relief | Cess | Total tax |
|---|---|---|---|---|---|
| ₹12,00,000 | ₹60,000 | — | ₹0 (87A rebate) | ₹0 | ₹0 |
| ₹12,10,000 | ₹61,500 | ₹10,000 | ₹10,000 | ₹400 | ₹10,400 |
| ₹12,25,000 | ₹63,750 | ₹25,000 | ₹25,000 | ₹1,000 | ₹26,000 |
| ₹12,50,000 | ₹67,500 | ₹50,000 | ₹50,000 | ₹2,000 | ₹52,000 |
| ₹12,75,000 | ₹71,250 | ₹75,000 | ₹71,250 (relief not needed) | ₹2,850 | ₹74,100 |
| ₹13,00,000 | ₹75,000 | ₹1,00,000 | ₹75,000 (relief not needed) | ₹3,000 | ₹78,000 |
The marginal-relief zone runs from taxable income of ₹12,00,001 to approximately ₹12,70,000. Above that level the slab tax naturally falls below the excess (the cliff no longer exists), and the full slab calculation applies without any special relief.
For a salaried employee with the ₹75,000 standard deduction, the gross-salary equivalent of the marginal-relief zone is roughly ₹12,75,001 to ₹13,45,000. Inside this window every extra rupee earned costs no more than one rupee in tax — the rate is never confiscatory.
Why this matters: Under the old regime, earning ₹10,000 above the ₹5.5L gross threshold triggers ₹15,080 in new tax — a loss. Under the new regime, earning ₹10,000 above the ₹12.75L gross threshold triggers at most ₹10,400 in tax — still painful but not economically irrational.
New regime FY 2024-25: the ₹7 lakh rebate
For completeness: in FY 2024-25 the new regime used different slabs and the 87A rebate was ₹25,000 on taxable income up to ₹7,00,000 (with marginal relief above). Salaried employees earning up to roughly ₹7.75 lakh gross paid zero tax that year. The Budget 2025 changes (effective FY 2025-26) raised this substantially to ₹12L / ₹60,000.
Who receives the rebate
Section 87A is available to resident individuals of all ages. This includes:
- Salaried employees and pensioners.
- Self-employed professionals and business owners (on their ordinary income; see capital-gains note below).
- Resident senior citizens (60–79) and super-seniors (80+).
Section 87A is not available to:
- Non-resident Indians (NRIs). NRIs are taxed at source on most Indian income with no rebate.
- Companies, LLPs, partnerships, or HUFs. The rebate is only for individuals.
- Special-rate income under the new regime. Short-term capital gains (STCG) taxed at 20% and long-term capital gains (LTCG) taxed at 12.5% are excluded from the rebate in the new regime. If capital gains push total income above the threshold, the ordinary-income portion can still claim the rebate; the special-rate portion cannot. This is an area that saw specific CBDT clarifications in 2024.
A note on non-salary income
The threshold applies to taxable income from all sources combined, not just salary. If you earn ₹11 lakh in salary (new regime, taxable = ₹10.25L after std deduction) but also earn ₹1 lakh in FD interest, your total taxable income is ₹11.25L — still below ₹12L, rebate applies in full. But if the FD interest pushes taxable income to ₹12.1L, you enter the marginal-relief zone with the tax capped at ₹10,000 (the excess over ₹12L).
Common mistakes
- Treating ₹12 lakh as the salary limit, not the taxable income limit. The threshold is ₹12L of taxable income — after the standard deduction. For salaried employees the effective gross-salary limit is ₹12.75L (₹12L + ₹75K standard deduction), not ₹12L.
- Assuming the old regime works the same way above ₹5L. The old regime has no marginal relief. Earning ₹1 above the ₹5.5L gross threshold (₹5L taxable) immediately triggers the full slab tax on the excess — a hard cliff that can leave you worse off than if you had earned less.
- Forgetting that cess applies only to the post-rebate amount. If the rebate cancels the entire slab tax, cess is also ₹0. A ₹0 tax bill is a ₹0 cess bill.
- Thinking the rebate and marginal relief are the same thing. They are distinct. The rebate (87A) applies at or below the threshold and cancels the slab tax. Marginal relief applies just above the threshold, after the standard rebate has been lost, and caps the tax at the income excess.
- Claiming 87A rebate against capital gains under the new regime. LTCG and STCG at special rates are explicitly excluded from the 87A rebate in the new regime. Many investors with mutual fund redemptions make this error.
Key takeaways
- Section 87A is a post-slab rebate that cancels income tax entirely if taxable income is within the limit. It is not a deduction.
- New regime FY 2025-26: rebate of up to ₹60,000 for taxable income ≤ ₹12L. For salaried employees, this means gross salaries up to ₹12.75 lakh pay zero tax.
- Marginal relief in the new regime prevents a cliff: just above ₹12L taxable, tax is capped at the excess over ₹12L — not the full slab amount.
- Old regime: rebate of up to ₹12,500 for taxable income ≤ ₹5L. No marginal relief — the cliff is real and steep.
- The rebate applies only to resident individuals. Capital gains taxed at special rates are excluded from the rebate in the new regime.
Frequently asked questions
Does the ₹12 lakh tax-free benefit apply to capital gains income too? Not in the new regime. STCG (equity, at 20%) and LTCG (equity above ₹1.25L, at 12.5%) are taxed at their own rates and the Section 87A rebate is not available against them. Your ordinary income — salary, interest — still gets the rebate if that portion is within ₹12L.
Why is the zero-tax salary figure ₹12.75 lakh, not ₹12 lakh? The 87A threshold is ₹12L of taxable income. A salaried person subtracts the ₹75,000 standard deduction from gross salary first, bringing ₹12.75L gross down to ₹12L taxable. That is why “₹12.75 lakh gross = ₹0 tax” is the correct shorthand for salaried employees.
Is there marginal relief at the ₹5 lakh old-regime threshold? No. The old regime’s 87A rebate has no marginal-relief provision. The moment taxable income exceeds ₹5L, the full slab tax applies on the excess — there is no transition smoothing. This makes the old-regime cliff more consequential than the new-regime threshold.
If I earn below ₹12L but have capital gains, do I still get the full rebate? Likely yes, if your ordinary (non-special-rate) income is below ₹12L. The capital gains portion is taxed separately at its special rate and the rebate does not apply to it. The interaction between the rebate, special-rate income and total income is an evolving area — use the income tax calculator or consult a CA if you have a mix of income types.
Does the rebate apply automatically when I file my ITR? Yes. The income tax computation in the ITR forms applies the 87A rebate automatically once taxable income is within the threshold. You do not need to claim it separately or file an additional form.
What happened to the ₹7 lakh rebate from last year? That was the new-regime 87A rebate for FY 2024-25: ₹25,000 for taxable income ≤ ₹7L. Budget 2025 revised the new-regime slabs and raised the rebate to ₹60,000 for taxable income ≤ ₹12L, effective from FY 2025-26.
The Section 87A provisions described here are based on the Finance Act for FY 2025-26 and FY 2024-25. The treatment of capital gains and the 87A rebate under the new regime was subject to specific CBDT clarifications in 2024; the interaction depends on the income mix. Tax rules change with each Budget. Consult a qualified chartered accountant or the official Income Tax Department portal for advice specific to your income composition and filing status.