Section 87A Rebate Income Tax New change from AY 2026-27

Section 87A Rebate Income Tax New change from AY 2026-27

The Finance Bill 2025 includes several proposals for amending Section 87A of the Income-tax Act, 1961, concerning the rebate of income tax for certain individuals.

Here’s a breakdown of the key changes:

• Increased Income Threshold The income threshold for claiming a tax rebate under Section 87A has been increased from Rs. 7 lakhs to Rs. 12 lakhs for resident individuals. This applies to those taxable under the new regime of Section 115BAC.
• Increased Rebate Amount The maximum rebate amount has been raised from Rs. 25,000 to Rs. 60,000.
• Eligibility for Normal Rate Incomes Only Rebate under Section 87A will be available only for incomes taxable at normal rates. It will not apply to special rate incomes such as short-term capital gains under Section 111A, long-term capital gains under Sections 112 and 112A, or casual income like lottery winnings.
• Marginal Relief Marginal relief will be provided where the income is marginally higher than Rs. 12,00,000. This ensures that the increase in tax liability does not exceed the increase in income above Rs 12,00,000.
  • Marginal relief is available to resident individuals with income marginally above Rs. 12 lakhs under Section 115BAC(1A).
  • For example, if a person has an income of Rs. 12,10,000, without marginal relief, the tax would be Rs. 61,500. However, with marginal relief, the tax to be paid is Rs. 10,000.
  • Marginal relief is calculated by comparing the tax liability without marginal relief (e.g., Rs. 61,500) with the amount exceeding the total income up to which the rebate is available (e.g., Rs 10,000). The marginal relief is the difference between these amounts.
  • The total income till which marginal relief is available is near about Rs. 12,75,000.
• Effective Date These amendments to Section 87A will take effect from April 1, 2026, and will apply to the assessment year 2026-2027 and subsequent assessment years.
• Deduction Limit The deduction for tax rebate under the first proviso to Section 87A shall not exceed the amount of income-tax payable as per the rates provided in Section 115BAC(1A).

Practical Implications

• Tax Savings Individuals with a total income up to Rs. 12,00,000 can claim a rebate of up to Rs. 60,000, resulting in a nil tax liability. Several practical scenarios demonstrate the tax savings for individuals with different income levels. For example, an individual with a total income (other than special rate income) of Rs. 9,00,000 would have a tax liability of Nil as per the new tax slab rates and tax rebate provisions, resulting in savings of Rs. 41,600.

Note: These changes are applicable under the new tax regime (Section 115BAC), which is the default tax regime.

Section 87A as per Finance Act 2024 (before Amedment of Finance Bill 2025)

Note

1 Substituted for “two thousand and five hundred” by the Finance Act, 2019, w.e.f. 1-4-2020. Earlier “two thousand and five hundred” was substituted for “five thousand” by the Finance Act, 2017, w.e.f. 1-4-2018 and “five thousand” was substituted for “two thousand” by the Finance Act, 2016, w.e.f. 1-4-2017.

2.Inserted by the Finance Act, 2023, w.e.f. 1-4-2024.

Amendment of section 87A as per Finance Bill 2025.

20. In section 87A of the Income-tax Act, with effect from
the 1st April, 2026,––

(a) in first proviso,––
(i) in clause (a),––
(I) for the words “seven hundred thousand  rupees”, the words “twelve hundred thousand
rupees” shall be substituted;
(II) for the words “twenty-five thousand rupees”, the words “sixty thousand rupees” shall be
substituted;
(ii) in clause (b), for the words “seven hundred thousand rupees” at both the places where they occur, the words “twelve hundred thousand rupees” shall be substituted;
(b) after the proviso, the following proviso shall be inserted, namely:––
“Provided further that the deduction under the first proviso, shall not exceed the amount of income-tax payable as per the rates provided in sub-section (1A) of section 115BAC.”.

Clause 20 of Finance Bill 2025.

Clause 20 of the Bill seeks to amend section 87A of the Income-tax Act relating to
rebate of income-tax in case of certain individuals.
The said section provides that an assessee, being an individual resident in India, whose
total income does not exceed five hundred thousand rupees, shall be entitled to a deduction,
from the amount of income-tax (as computed before allowing the deductions under this
Chapter) on his total income with which he is chargeable for any assessment year, of an
amount equal to hundred per cent of such income-tax or an amount of twelve thousand and
five hundred rupees, whichever is less.
Proviso to the said section provides that where the total income of the assessee is
chargeable to tax under sub-section (1A) of section 115BAC, and the total income—
(a) does not exceed seven hundred thousand rupees, the assessee shall be entitled to a
deduction from the amount of income-tax (as computed before allowing for the deductions
under this Chapter) on his total income with which he is chargeable for any assessment year,
of an amount equal to one hundred per cent. of such income-tax or an amount of twenty-five
thousand rupees, whichever is less;
(b) exceeds seven hundred thousand rupees and the income-tax payable on such total
income exceeds the amount by which the total income is in excess of seven hundred thousand
rupees, the assessee shall be entitled to a deduction from the amount of income-tax (as
computed before allowing the deductions under this Chapter) on his total income, of an
amount equal to the amount by which the income-tax payable on such total income is in
excess of the amount by which the total income exceeds seven hundred thousand rupees.
It is proposed to amend the proviso to the said section to substitute the seven hundred
thousand rupees with twelve hundred thousand rupees and twenty-five thousand rupees with
sixty thousand rupees respectively.
It is further proposed to insert a second proviso to the said section to provide that the
deduction under the first proviso, shall not exceed the amount of income-tax payable as per
the rates provided in sub-section (1A) of section 115BAC.

These amendments will take effect from 1st April, 2026 and will, accordingly, apply
in relation to the assessment year 2026-2027 and subsequent assessment years.

Memorandum Explaning the Provisons of Finance Bill 2025 is as follow

Rebate under section 87A
Under the provisions of section 87A of the Act, an assessee, being an individual resident in
India, having total income not exceeding Rs 5 lakh, is provided a rebate of 100 per cent of the amount of income-tax payable i.e., an individual having income till Rs 5 lakh is not required to pay any incometax.

2. Finance Act, 2023 inserted proviso to the said section, to provide rebate of income-tax in cases
where the total income of such assessee is chargeable to tax under sub-section (1A) of section 115BAC.
Proviso to section 87A provides the rebate of income-tax in cases of such individuals, upto Rs.25,000/- where the total income does not exceed Rs. 7,00,000/- (clause (a) of the said proviso) and marginal relief where the total income exceeds Rs. 7,00,000/- (clause (b) of the said proviso) to income chargeable to tax under sub-section (1A) of section 115BAC.
3. The provisions of sub-section (1A) of section 115BAC are subject to the other provisions of
Chapter XII i.e. determination of tax in certain special cases. Hence, proviso to section 87A clearly
provides that tax on incomes chargeable at special rates (for e.g.: capital gains u/s 111A, 112 etc.) as specified under various provisions of Chapter XII, are not included while determining the rebate of income-tax under the first proviso to section 87A.

4. From assessment year 2026-27 onwards, for an assessee, being an individual resident in India
whose income is chargeable to tax under the sub-section (1A) of section 115BAC, it is proposed to,–
(i) enhance the limit of total income for rebate in clause (a) and (b) of first proviso under section
87A, on which the income-tax is payable as per the rates of income-tax under sub-section (1A)
of section 115BAC, from Rs. 7,00,000/- to Rs. 12,00,000/- and the limit of rebate in clause (a)
of first proviso to section 87A from Rs. 25,000/- to Rs. 60,000/-.
(ii) rationalise the first proviso to section 87A by inserting a new proviso so as to provide that the
deduction under the first proviso, shall not exceed the amount of income-tax payable as per the
rates provided in sub-section (1A) of section 115BAC.
5. Further, as mentioned in para. 4 above, such rebate of income-tax is not available on tax on
incomes chargeable at special rates (for e.g.: capital gains u/s 111A, 112 etc.).

[Clauses 2, 20, 24 & the First Schedule]

Refer

Income Tax Website of Govt of India