Filing your income tax return for the financial year 2025-26 requires a clear understanding of the applicable tax rates and slabs under both the new and old income tax regimes. This is especially important for salaried individuals whose income falls below certain thresholds, as they may qualify for zero tax liability. However, the limits for zero tax differ depending on the regime chosen, and it is crucial to distinguish this from the basic tax exemption limit. The key to achieving zero tax lies in the rebate under Section 87A of the Income Tax Act.
What is the Rebate Under Section 87A?
Under the new income tax regime, income up to Rs 12 lakh is tax-free, although the basic exemption limit is Rs 4 lakh. For example, if your income is Rs 9 lakh, you need to claim eligibility for zero tax liability. The rebate under Section 87A provides tax relief to resident individuals whose total income is below prescribed limits. Hitesh Sharma, Partner at Vialto Partners, explains that tax (before cess) is first computed based on applicable rates, then reduced by the rebate available under Section 87A. Under the new regime, individuals with total income up to Rs 12 lakh can claim a rebate of up to Rs 60,000, resulting in zero tax liability. Under the old regime, a rebate of up to Rs 12,500 is available for taxable income up to Rs 5 lakh.
Marginal Relief Under the New Tax Regime
In addition to the rebate, marginal relief protects taxpayers whose income slightly exceeds Rs 12 lakh under the new regime. According to Sharma, if income exceeds Rs 12 lakh, the tax payable is limited to the amount by which income exceeds Rs 12 lakh. This relief is available only if total taxable income is less than Rs 12,70,588.
Consider the following examples for FY 2025-26 (Assessment Year 2026-27), assuming standard deduction of Rs 50,000 and Section 80C deductions of Rs 1.5 lakh under the old regime, and standard deduction of Rs 75,000 under the new regime:
- Illustration 1 (Old Regime): Gross Total Income Rs 7,00,000, Deductions Rs 2,00,000, Taxable Income Rs 5,00,000, Tax before cess Rs 12,500, Rebate Rs 12,500, Tax after rebate Rs 0.
- Illustration 2 (Old Regime): Gross Total Income Rs 7,45,000, Deductions Rs 1,50,000, Taxable Income Rs 5,45,000, Tax before cess Rs 21,500, Rebate not available, Tax after rebate Rs 21,500.
- Illustration 3 (New Regime): Gross Total Income Rs 12,75,000, Deductions Rs 75,000, Taxable Income Rs 12,00,000, Tax before cess Rs 60,000, Rebate Rs 60,000, Tax after rebate Rs 0.
- Illustration 4 (New Regime): Gross Total Income Rs 12,77,000, Deductions Rs 75,000, Taxable Income Rs 12,02,000, Tax before cess Rs 60,300, Rebate Rs 58,300, Tax after marginal relief Rs 2,000.
- Illustration 5 (New Regime): Gross Total Income Rs 13,45,588, Deductions Rs 75,000, Taxable Income Rs 12,70,588, Tax before cess Rs 70,588, Marginal relief not available, Tax after rebate Rs 70,588.
Key Points to Note
Under the new regime, the rebate under Section 87A is not available on income taxed at special rates, such as capital gains or lottery winnings. Under the old regime, the rebate can be claimed against tax on total income, except for long-term capital gains from equity shares, units of equity-oriented funds, or business trusts under Section 112A. Additionally, Section 87A of the Income Tax Act, 1961 has been replaced by Section 156 of the Income Tax Act, 2025, effective from April 1, 2026, applicable for FY 2026-27.
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