Section 87A Rebate Explained: Is Income up to ₹12 Lakh Really Tax-Free?
You have probably seen the headline: income up to twelve lakh rupees is now tax-free. It is broadly true for the assessment year 2026-27 under the New tax regime, but the details matter. The benefit comes from a single provision — the Section 87A rebate — and understanding exactly how it works tells you whether your own income really escapes tax, and where the rule quietly stops applying.
This guide explains the rebate in plain English: what it is, the New and Old regime limits, who qualifies, the higher salaried figure you may have heard, the cushion called marginal relief, and the important exception for capital gains and crypto.
What is the Section 87A rebate?
The Section 87A rebate is a direct reduction in the income tax a resident individual has to pay. It is not a deduction from your income; it is a rebate on the tax itself. After your tax is calculated on your taxable income, the rebate is subtracted. Then the health and education cess is added. If your income is within the qualifying limit, the rebate can wipe out your entire tax, leaving nothing to pay.
Because it acts on the final tax figure, the 87A rebate is why a person can have taxable income in the lakhs and still owe zero income tax.
The New regime: zero tax up to ₹12 lakh
For the assessment year 2026-27 (financial year 2025-26), Budget 2025 expanded the rebate sharply under the New tax regime. A resident individual whose total income is up to twelve lakh rupees pays no income tax, because the rebate offsets the tax that would otherwise be due. The maximum rebate available is around ₹60,000, which is exactly the tax on a ₹12 lakh income under the New regime slabs.
There is a further point that salaried people often miss. The New regime also offers a standard deduction of seventy-five thousand rupees from salary income. Because the twelve-lakh limit is measured on taxable income after that deduction, a salaried employee can earn a gross salary of up to about twelve lakh seventy-five thousand rupees and still arrive at zero tax. For salaried readers, that ₹12.75 lakh figure is the practical headline.
The Old regime: rebate up to ₹5 lakh
The Old tax regime also offers an 87A rebate, but on a much smaller scale than it has in the past. Under the Old regime, a resident individual with a total income of up to five lakh rupees gets a rebate of up to twelve thousand five hundred rupees, further reducing the tax to nil at that level.
This gap is one of the clearest reasons the New regime has become the default for most taxpayers without large deductions. If you claim heavy deductions such as 80C, 80D, HRA, and home-loan interest, the Old regime can still win overall, so it remains worth comparing both. Our guide on the Old versus New tax regime walks through that comparison.
Who qualifies for the rebate?
The 87A rebate is available only to a resident individual. It is not available to a non-resident, nor to a Hindu Undivided Family, firm, or company. You also need your total income to be within the relevant limit for the regime you choose. If your income crosses the limit, the rebate is not simply reduced — it can fall away entirely, which is where the next point becomes important.
Marginal relief: the cushion just above the limit
Without a cushion, earning one rupee over twelve lakh under the New regime could push you from zero tax to a tax of tens of thousands of rupees — an absurd jump. To prevent this, the law provides marginal relief. In simple terms, when your income is only slightly above the rebate limit, your total tax is capped so that it never exceeds the amount by which your income crosses the limit. The effect is a smooth taper just above ₹12 lakh rather than a cliff, so a small increase in income never costs you more in tax than the increase itself.
The catch: special-rate income is not covered
This is the exception that surprises people. The 87A rebate applies to income taxed at the normal slab rates. It does not apply to income taxed at special rates. The two common examples are long-term capital gains on listed shares and equity mutual funds taxed under Section 112A, and gains on virtual digital assets such as crypto taxed at a flat rate under Section 115BBH.
In practice, this means you can have a total income under twelve lakh and still owe tax — because a slice of that income is capital gains or crypto gains that the rebate cannot touch. If you sold shares, equity funds, or crypto during the year, do not assume the twelve-lakh headline covers you. Our guides on capital gains and on crypto tax explain how those slices are taxed separately.
How to actually claim it
You do not file a separate form for the 87A rebate. When you prepare your income tax return, the rebate is applied automatically once your residency, regime, and total income are entered correctly. The risk is choosing the wrong regime, or forgetting that special-rate income sits outside the rebate, and then being surprised by a tax demand.
This is where comparing both regimes properly pays off. MyTaxLocker reads your Form 16 on your device, computes your tax under both the Old and New regimes, applies the Section 87A rebate where you qualify, and shows you the bottom line for each before you choose.
See whether your income is tax-free — both regimes, side by side
MyTaxLocker reads your Form 16, applies the Section 87A rebate where you qualify, and shows your tax under the Old and New regime before you choose — then gives you a ready-to-upload return.
Get it on Google PlayThe bottom line
The ₹12 lakh headline is real for the assessment year 2026-27 under the New regime, and salaried people get a little more room thanks to the standard deduction. But the rebate only helps resident individuals, only on slab-rate income, and marginal relief smooths the edge just above the limit. Know those boundaries, and you will know precisely whether your income is tax-free or not. Limits and rebate amounts are revised in most Budgets, so confirm the figures for your assessment year on the official portal before relying on them.