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AY 2026-27 (FY 2025-26). This guide reflects Budget 2025's raised 87A rebate threshold (₹12 lakh under the new regime) and the marginal relief proviso. Last reviewed 7 May 2026.
Budget 2025 quietly did the single biggest thing for middle-class take-home in years: it raised the Section 87A rebate under the new regime from ₹7 lakh to ₹12 lakh of taxable income. Combined with the ₹75,000 standard deduction that already applied, that pushed the fully tax-free gross salary ceiling to ₹12,75,000 for any salaried employee on the new regime.
A ₹12.75L salary now legally pays zero income tax. The same salary in AY 2024-25 owed about ₹83,200 in tax. In AY 2025-26 it owed about ₹40,000 (after the Budget 2024 ₹7L threshold). In AY 2026-27 it owes nothing at all.
But the cliff is real. ₹1 above the threshold doesn't owe ₹1 of tax — without the marginal relief proviso, it would owe roughly ₹60,000. The relief mechanism exists to fix that, and it's worth understanding exactly when it kicks in.
The two thresholds in 2026
| Regime | Rebate threshold (taxable income) | Max rebate amount | Effective tax-free gross salary |
|---|---|---|---|
| New (Budget 2025) | ₹12,00,000 | ~₹60,000 | ₹12,75,000 |
| Old | ₹5,00,000 | ₹12,500 | ₹5,50,000 |
The new-regime rebate has no flat-rupee cap — it equals whatever tax is owed on that taxable income, so as the slabs widen, the rebate scales up automatically. The old-regime rebate is hard-capped at ₹12,500.
The cliff problem — and the marginal relief fix
Without the marginal relief proviso, the rebate would create a brutal step at the threshold. Consider taxable income of ₹12,00,001 under the new regime:
- Tax under the new regime slabs: ₹4L × 0% + ₹4L × 5% + ₹4L × 10% + ₹0.0001L × 15% ≈ ₹60,000
- 87A rebate: not available because taxable income exceeds ₹12L
- Tax payable: ~₹60,000 + 4% cess ≈ ₹62,400
Compared to ₹12,00,000 paying zero, that ₹1 of extra income would have cost ₹62,400 in tax. Anyone earning at the boundary would have a strong incentive to keep total income below the rebate ceiling — exactly the kind of distortion the rebate isn't meant to create.
The marginal relief proviso fixes this. The rule: tax payable can never exceed the amount of taxable income that crossed the rebate threshold.
In our example, ₹1 crossed the threshold. Tax payable is therefore capped at ₹1, not ₹62,400. As taxable income climbs further past ₹12 lakh, the cap rises with it — until the unrelieved tax catches up and the relief stops binding.
The smoothing band — where marginal relief actually applies
| Taxable income | Slab tax (no rebate) | Marginal relief cap | Tax payable (incl. cess) |
|---|---|---|---|
| ₹12,00,000 | ~₹60,000 | rebate covers it | ₹0 |
| ₹12,10,000 | ~₹61,500 | ₹10,000 | ₹10,400 |
| ₹12,30,000 | ~₹64,500 | ₹30,000 | ₹31,200 |
| ₹12,50,000 | ~₹67,500 | ₹50,000 | ₹52,000 |
| ₹12,60,000 | ~₹69,000 | ₹60,000 | ₹62,400 |
| ₹12,70,000 | ~₹70,500 | ₹70,500 (relief stops) | ₹73,320 |
Numbers are illustrative and rounded — use the salary tax calculator for precision. The relief band runs from roughly ₹12,00,001 up to ~₹12,70,000 of taxable income, after which the slab tax exceeds the smoothing cap and the proviso stops biting.
Run it on your own number
What the rebate does NOT cover
A common mistake is to assume the rebate wipes out all tax for income under ₹12 lakh. It only covers slab-rate income. Anything taxed at a special rate is computed separately:
- Equity long-term capital gains (12.5% above ₹1.25 lakh per FY) — not covered by 87A.
- Equity short-term capital gains (20%) — not covered.
- Lottery, crossword, online gaming winnings (30% flat) — not covered.
- Cryptocurrency / virtual digital asset gains (30% flat) — not covered.
- Income from house property let out at high rent — covered (slab-rate).
- Salary, business income, interest, FD income — covered (slab-rate).
If your taxable income is ₹11.5 lakh of salary plus ₹3 lakh of equity LTCG, the salary portion is fully rebated, but the LTCG owes (₹3L − ₹1.25L) × 12.5% = ₹21,875 + cess regardless. The 87A rebate on slab-rate income does not flow through to the special-rate piece.
Old regime — the ₹5 lakh threshold is unchanged
The old regime's 87A rebate has not moved in years. It rebates tax on taxable income up to ₹5 lakh, capped at ₹12,500. Most old-regime users are above this threshold (the deduction stack pulls taxable income below ₹5L only at very modest gross incomes), so the rebate matters more as a floor for low-income taxpayers than as a planning lever.
The Budget 2025 widening of the new-regime rebate is one more reason the new regime now dominates the choice for incomes below ₹15 lakh.
Warning
The 87A rebate is NOT a refund mechanism. If your tax payable before the rebate is already zero, there is nothing for the rebate to remove — it cannot generate a refund or roll forward to next year. It also can't be claimed against a spouse's income or transferred. One person, one year, one cap.
Practical implications
- Compensation negotiations. A take-home of ₹12.75 lakh gross is materially more attractive in 2026 than in 2025 — the gross-to-net ratio is 100% before EPF, ESI, and PT. This affects offer benchmarking for early-mid career roles.
- Variable pay timing. A bonus that pushes salary from ₹12L to ₹12.5L now flows through under marginal relief — you keep most of it. The same bonus pre-Budget-2025 would have sat in a sharper regime.
- Old-regime stayers. If you're still on the old regime because of a strong deduction stack, recompute. The new regime's structural saving has widened — particularly for renters without home loans and earners below ₹17 lakh.
Verify with the comparison calculator
FAQ
The follow-up questions people usually ask after the main recommendation is already clear.
What is the Section 87A rebate limit in AY 2026-27?
Under the new regime, Section 87A rebates the full tax liability on taxable income up to ₹12 lakh — raised from ₹7 lakh in Budget 2025. Combined with the ₹75,000 standard deduction, this makes gross salary up to ₹12,75,000 fully tax-free for salaried employees. Under the old regime, the rebate is unchanged: full rebate up to ₹5 lakh of taxable income, ₹12,500 maximum.
What is marginal relief under Section 87A?
Marginal relief is a smoothing rule that prevents the rebate cliff. Without it, taxable income of ₹12,00,001 under the new regime would jump from zero tax (rebate covers it) to about ₹61,500 of tax (no rebate available) — a ₹61,500 hit on ₹1 of extra income. The marginal relief proviso caps the tax payable so it never exceeds the amount of income that crossed the ₹12 lakh threshold, until the underlying tax catches up at higher incomes.
Does 87A apply to capital gains income?
The rebate is computed on tax payable on slab-rate income only. Capital gains taxed at special rates — long-term capital gains on equity at 12.5%, short-term at 20%, and similar special-rate income — are excluded from the rebate. If your taxable income is ₹11 lakh from salary plus ₹2 lakh of equity LTCG, the salary portion is rebated to zero but the LTCG portion is taxed independently at 12.5%.
Is the rebate available in both regimes?
Yes, but with very different thresholds. New regime: rebate up to ₹12 lakh of taxable income (Budget 2025). Old regime: rebate up to ₹5 lakh of taxable income (unchanged), capped at ₹12,500 of tax. The new regime's rebate is by far the more generous of the two.
Can I claim the rebate if my tax is already zero?
No. Section 87A is a rebate against tax payable, not a refundable credit. If your tax liability before the rebate is zero (because you fall below the first slab), there is nothing for the rebate to wipe out. You can also not carry it forward or share it with a spouse — it is a per-individual, per-year cap on tax.