Sec 87A at ₹12 lakh — what FA 2025 actually changed
Under the new regime, Sec 87A gives a rebate of up to ₹60,000 when taxable income is ₹12 lakh or less (Finance Act 2025, from FY 2025-26), so a salaried earner with the ₹75,000 standard deduction owes nothing on up to ₹12.75 lakh. Marginal relief applies just above ₹12 lakh; gains taxed under Secs 111A and 112A are excluded.
The headline number
Under the new regime, for FY 2025-26 (AY 2026-27):
- Taxable income up to ₹12,00,000: Sec 87A rebate wipes out the tax. Net income-tax payable =
zero. - Maximum Sec 87A rebate: ₹60,000 (matches the tax at the ₹12L slab).
- Standard deduction: ₹75,000 for salaried & pensioners (FA 2024 raised from ₹50,000).
- Combined effective zero-tax salary: ₹12,75,000 gross.
The old regime continues to cap Sec 87A at ₹12,500 with the ₹5,00,000 threshold. The new regime is now meaningfully ahead for most salaried earners.
What changed vs the prior position
| Year | New regime threshold | Max rebate | Old regime |
|---|---|---|---|
| FY 2023-24 | ₹7,00,000 | ₹25,000 | ₹5L / ₹12,500 |
| FY 2024-25 | ₹7,00,000 | ₹25,000 | ₹5L / ₹12,500 |
| FY 2025-26 (FA 2025) | ₹12,00,000 | ₹60,000 | ₹5L / ₹12,500 |
The new-regime slabs (so the rebate has something to bite)
FA 2025 also widened the slab bands. The combined slab + rebate effect is what makes ₹12L tax-free:
| Slab | Rate | Cumulative tax |
|---|---|---|
| ₹0 – ₹4,00,000 | Nil | ₹0 |
| ₹4,00,001 – ₹8,00,000 | 5% | ₹20,000 |
| ₹8,00,001 – ₹12,00,000 | 10% | ₹60,000 |
| ₹12,00,001 – ₹16,00,000 | 15% | ₹1,20,000 |
| ₹16,00,001 – ₹20,00,000 | 20% | ₹2,00,000 |
| ₹20,00,001 – ₹24,00,000 | 25% | ₹3,00,000 |
| Above ₹24,00,000 | 30% | — |
Tax at ₹12L = ₹60,000. The Sec 87A rebate is "up to ₹60,000" — it neutralises this exactly. ₹1 above ₹12L and you owe full slab tax… unless marginal relief kicks in.
The marginal relief proviso — why ₹12,10,000 doesn't cost ₹70,000
Without marginal relief, a salaried earner with ₹12,00,001 taxable income would suddenly owe ₹60,000+ in tax because they crossed the rebate threshold. That cliff-edge would be perverse — earning ₹1 more costs ₹60,000.
FA 2025 inserted a proviso to Sec 87A that says: the additional tax payable by an individual just over the threshold cannot exceed the income excess. Practically, this means:
- At taxable income ₹12,10,000 → income excess = ₹10,000. Marginal relief caps additional tax at ₹10,000.
- At taxable income ₹12,50,000 → income excess = ₹50,000. Marginal relief caps additional tax at ₹50,000.
- At taxable income ₹12,70,591 (roughly) → marginal relief equals the slab-computed tax. Beyond this point, slab tax kicks in fully without relief.
What Sec 87A does not cover
The rebate is generous but narrow. It excludes:
- Sec 111A short-term capital gains on listed equity (20% post-23-Jul-2024)
- Sec 112A long-term capital gains on listed equity (12.5% over ₹1.25L)
- Sec 112 long-term capital gains on other capital assets (12.5%)
- Sec 115BBE tax on unexplained income (60% + surcharge + cess)
- Sec 115BBJ winnings from online games (30%)
FA 2025 explicitly clarified the Sec 111A/Sec 112A exclusion, settling an earlier dispute where some taxpayers had been claiming Sec 87A against equity LTCG/STCG. The ITR utility blocks it now.
Who benefits most
Three cohorts gain the most from this change:
Salaried employees earning ₹10-15L
The biggest beneficiary cohort. A ₹12.5L employee in the new regime — without using any deduction other than the standard deduction — now owes effectively zero tax. Pre-FA-2025 they would have paid ₹95,000+. This is the largest single tax-cut Indian middle-class has received in a decade.
Freelancers & consultants under Sec 44ADA
A consultant declaring 50% presumptive income on ₹25L gross receipts has ₹12.5L taxable. Under Sec 87A they now pay effectively zero (subject to the ₹75K standard deduction not applying to PGBP income — so the cap is at ₹12L taxable). Sweet spot is gross receipts up to ₹24L for total tax-free.
Returning NRIs in transition years
An NRI returning to India and becoming "Resident but Not Ordinarily Resident" (RNOR) has only Indian-source income taxable. Many fall in the ₹8-12L bracket — fully sheltered by the new rebate. Plus their foreign income remains untaxed under RNOR rules.
What doesn't change
- Surcharge. Triggers above ₹50L total income — 10/15/25/37% (FA 2023 new-regime cap 25%). Surcharge applies after rebate consumption.
- Cess. 4% health-and-education cess applies on tax + surcharge.
- Mandatory ITR filing. Even if your tax is zero, you must file if income > basic exemption OR if any of the Sec 139(1) seventh-proviso triggers fire (foreign travel > ₹2L, electricity > ₹1L, etc).
- TDS still applies. Your employer's salary TDS doesn't go to zero automatically — file Form 12BB and explicitly tell payroll you're under the new regime (Form 10-IEA if you're switching out of new).
- Advance tax still applies if any non-salary tax liability remains.
How to lock in the benefit
- Confirm new regime is active. New is the default from AY 2024-25, but employer payroll sometimes lags. Confirm with HR.
- Don't accidentally elect old regime via Form 10-IEA. Once filed for the year, it's binding. Election is mandatory if you want to claim 80C/80D/HRA.
- If salary is ₹11-13L, do the math: new regime almost always wins. Old regime needs ~₹3.5-4L in deductions to break even.
- Track your capital gains separately — Sec 87A doesn't cover them, so realised STCG/LTCG sits outside the rebate shelter.
- Run the numbers with our Sec 87A rebate analyzer or the Income Tax calculator.
One worked example
Priya, salaried at ₹15 lakh CTC. Standard deduction ₹75,000 → taxable ₹14,25,000. No other deductions claimed. New regime.
| Step | Computation | ₹ |
|---|---|---|
| Tax slab | 0 + 5%(8-4=4L) + 10%(12-8=4L) + 15%(14.25-12=2.25L) | 93,750 |
| Sec 87A rebate | Income > ₹12L → no rebate; check marginal relief | 0 |
| Marginal relief check | Income excess ₹2.25L > tax bumped by ₹93,750 → MR not available | 0 |
| Add cess @ 4% | 93,750 × 4% | 3,750 |
| Total tax | 97,500 |
Effective tax rate: 6.85% on gross salary. Pre-FA-2025 the same Priya would have paid ~₹1,42,500. Direct saving: ~₹45,000.
Related calculators & reading
- Sec 87A Rebate Analyzer — exact figure with marginal-relief check
- Income Tax Calculator — full new vs old regime comparison
- Tax Saving Optimizer — which deductions still pay off
- Old vs New regime — the perennial guide
- Finance Act 2025 — 14 changes for FY 25-26