Section 87A Rebate: Zero Tax Up to This Income Limit

Section 87A is the provision that lets a large number of resident individual taxpayers pay literally zero income tax, not because their income is exempt, but because a rebate wipes out the computed tax liability entirely up to a defined threshold. It is one of the most searched tax provisions every filing season, and also one of the most misunderstood, especially where capital gains are involved. This guide, now renumbered Section 156 under the Income Tax Act 2025, breaks down exactly how the rebate works under both regimes.

Rebate Thresholds: Old Regime vs New Regime

The rebate amount and the income threshold at which it applies are different under the two regimes, and taxpayers comparing which regime suits them should factor this in alongside slab rates.

The gap between the two thresholds is significant, and it is one reason the new regime has become the default choice for a much larger share of individual taxpayers whose income sits in this range. See our slab comparison guide for the full rate schedule under each regime before deciding which one to opt for.

Marginal Relief: Softening the Cliff at the Threshold

Without a safeguard, a taxpayer earning even a few thousand rupees above the rebate threshold would suddenly lose the entire rebate and owe tax on the full income, an outcome disproportionate to how little they crossed the limit by. Marginal relief exists precisely to prevent this: the tax payable for a taxpayer just above the threshold is capped so that it never exceeds the amount by which their income exceeds the threshold itself.

In practical terms, this creates a gradual phase-out zone above the headline threshold rather than a hard cliff. A taxpayer whose income is a little above Rs 12 lakh under the new regime, for instance, does not immediately owe tax computed on the full slab structure; the marginal relief calculation is applied first, and only once income rises further does the ordinary slab-based tax overtake the marginal-relief-capped amount. This zone extends for a defined band above the threshold before ordinary slab computation takes over fully; always have your CA run the marginal relief computation directly rather than assuming the headline threshold is a hard cut-off.

What Is Excluded From the Rebate: The Capital Gains Carve-Out

This is the exclusion that catches the most taxpayers by surprise. Specified capital gains taxed at special rates are excluded from the scope of the Section 87A rebate regardless of total income, most notably short-term capital gains taxed under Section 111A (broadly, STCG on listed equity shares and equity-oriented funds subject to STT) and long-term capital gains taxed under Section 112/112A (broadly, LTCG on listed securities and certain other assets).

What this means in practice: a taxpayer whose total income, including such special-rate capital gains, is within the Rs 12 lakh new-regime threshold cannot assume their entire tax liability drops to zero. The rebate does not reach the portion of tax computed on these specified capital gains; that tax remains payable even if the taxpayer's overall income would otherwise qualify for a full rebate. Other capital gains not covered by these specific special-rate provisions may still be eligible for rebate treatment depending on how the return is computed, so this needs a case-by-case check rather than a blanket assumption either way.

This carve-out is a common trap for taxpayers who sold shares or equity mutual fund units during the year and assume their modest salary-plus-capital-gains income falls safely under the rebate threshold. It often does not, for the capital gains portion specifically.

Who Cannot Claim the Rebate at All

Beyond the capital gains carve-out, the rebate is available only to resident individual taxpayers. Non-resident individuals, including NRIs, cannot claim the Section 87A rebate under either regime, regardless of how low their Indian-source total income is. Hindu Undivided Families (HUFs), firms, companies, and other non-individual assessees are also outside the scope of this rebate; it is specifically an individual-taxpayer relief provision.

A Note on Section Numbering

Section 87A of the Income Tax Act, 1961 is now Section 156 under the Income Tax Act, 2025. This is a confirmed mapping, not a qualitative estimate. The rebate mechanics, thresholds, and the capital gains exclusion described above continue to apply under the renumbered section; this guide uses the familiar old-Act number in the title and throughout because that remains the term taxpayers and most professional literature still search for and cite day-to-day.

The Section 87A (now Section 156) rebate is genuinely useful relief for a large share of Indian taxpayers, but "zero tax up to Rs 12 lakh" is a headline that needs the marginal relief mechanics and the capital gains exclusion layered on top before you can rely on it for your own return. If your income mix includes equity capital gains, a rental property, or a switch between regimes this year, get the actual computation checked rather than assuming the threshold alone determines your liability. Our tax advisory services include full ITR computation and regime comparison for individual taxpayers.