Section 87A Rebate
Section 87A of the Income Tax Act provides a tax rebate to resident individuals whose total income does not exceed a specified threshold, effectively reducing their tax liability to zero up to a defined limit.
Section 87A was introduced in the Finance Act 2013 and has been revised multiple times to align with the government's goal of reducing the tax burden on lower-income individuals. Under the new tax regime introduced by Finance Act 2023 (applicable from AY 2024-25 onwards), the rebate amount was enhanced to ₹25,000, available to resident individuals with taxable income up to ₹7 lakh. This means that if a person's net taxable income does not exceed ₹7 lakh under the new regime, the total income tax liability is reduced to nil after applying the rebate.
Under the old tax regime, the rebate remains available at ₹12,500 for individuals with taxable income up to ₹5 lakh. This distinction makes the new regime particularly attractive for those in the ₹5–7 lakh income band who previously had a tax liability under the old regime without sufficient deductions to bring them to the ₹5 lakh threshold.
A crucial nuance is the concept of marginal relief, which applies when total income slightly exceeds the rebate threshold. Without marginal relief, a person earning ₹7.01 lakh could owe tax on the full ₹7.01 lakh, resulting in a disproportionately high effective tax rate on the marginal ₹1,000. Marginal relief ensures that the incremental tax payable does not exceed the incremental income above the ₹7 lakh threshold. For example, if total income is ₹7.10 lakh under the new regime, the tax before rebate may be, say, ₹29,000, but marginal relief would cap the actual tax at ₹10,000 (the excess over ₹7 lakh), resulting in a net tax of ₹10,000 plus applicable surcharge and cess.
It is critical to note that the rebate under Section 87A applies after computing the basic income tax but before adding surcharge and health and education cess. Special rate income such as long-term capital gains under Section 112A or short-term capital gains under Section 111A does not qualify for the Section 87A rebate in the new tax regime — a nuance that caught many investors off guard after a judicial ruling in 2024 that was later clarified by the income tax department. Taxpayers with such capital gains income must compute their tax liability carefully, ensuring the rebate is applied only against tax on ordinary income and not against tax on special-rate income.
Salaried individuals in the ₹6–7.5 lakh gross income range benefit most from this provision when combined with the ₹75,000 standard deduction available under the new regime. Effective tax planning around this rebate threshold has become a common exercise for mid-level employees deciding between old and new regimes.