What is Income Tax? Meaning, Rules, Tax Slabs, Types and Tax Guide for Tax Year 2026-27

Last updated: 11 August 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • Income tax is a direct tax on income, administered by the CBDT. Income up to 31 March 2026 is taxed under the 1961 Act and the Income-tax Act, 2025 applies from 1 April 2026.
  • The new regime is the default: nil tax up to ₹4 lakh, rising in steps to 30% above ₹24 lakh, with a ₹75,000 standard deduction and nil tax up to ₹12 lakh after the rebate.
  • Capital gains, lottery winnings and crypto income are taxed at special rates.
  • Choose the right ITR form, meet the due dates and pay tax through TDS, advance tax and self-assessment tax.

Income tax is the most important direct tax in India. It is charged on the income a person earns in a year, and it is administered by the Central Board of Direct Taxes (CBDT). Income earned up to 31 March 2026 (FY 2025-26, AY 2026-27) is taxed under the Income-tax Act, 1961. From 1 April 2026 a new law, the Income-tax Act, 2025, applies, and income is reported for a “Tax Year” (see our note on the Tax Year). Individuals can choose between the new and the old tax regime.

What is Income Tax?

Income tax is a tax on the income earned by a person in a year. The rate depends on the amount of income, the type of taxpayer and, for individuals, the regime chosen.

Who pays Income Tax?

The person who is liable to pay tax or any other sum under the Act is called the assessee. The Act recognises these kinds of persons:

  1. Individual
  2. Hindu Undivided Family (HUF)
  3. Company
  4. Firm, including a limited liability partnership (LLP)
  5. Association of Persons (AOP) or Body of Individuals (BOI)
  6. Local authority
  7. Artificial juridical person

The Income Tax Act

Under Article 265 of the Constitution, no tax can be levied or collected except under the authority of law. The rules for computing income, deductions, rates, surcharge, cess, due dates and penalties are in the Income-tax Act. After more than six decades of amendments the 1961 Act had become long and hard to follow, so the Income-tax Act, 2025 replaced it from 1 April 2026 with a simpler structure. Section numbers have changed, but most of the rates and rules are carried over.

The five heads of income

Income is computed under five heads: salary, income from house property, profits and gains of business or profession, capital gains, and income from other sources.

Income Tax Slab Rates

Individuals and HUFs are taxed on slab rates. The new regime is the default; an individual may opt for the old regime. Budget 2026 did not change the slab rates.

New tax regime

Total income Rate
Up to ₹4,00,000 Nil
₹4,00,001 to ₹8,00,000 5%
₹8,00,001 to ₹12,00,000 10%
₹12,00,001 to ₹16,00,000 15%
₹16,00,001 to ₹20,00,000 20%
₹20,00,001 to ₹24,00,000 25%
Above ₹24,00,000 30%
  • A standard deduction of ₹75,000 is allowed to salaried taxpayers and pensioners.
  • A rebate of up to ₹60,000 makes the tax nil for a total income up to ₹12 lakh (see rebate under section 87A).

Old tax regime (individuals below 60 years)

Total income Rate
Up to ₹2,50,000 Nil
₹2,50,001 to ₹5,00,000 5%
₹5,00,001 to ₹10,00,000 20%
Above ₹10,00,000 30%

The basic exemption limit is ₹3 lakh for resident senior citizens (60 to 79 years) and ₹5 lakh for resident super senior citizens (80 years and above) in the old regime. The standard deduction is ₹50,000 for salaried taxpayers and pensioners. The old regime allows many deductions and exemptions; the new regime allows very few.

Surcharge and cess

A surcharge is added to the tax of high-income individuals, and health and education cess of 4% is added on the tax plus surcharge. In the new regime the surcharge is capped at 25%.

Special tax rates

Income type Rate
Long-term capital gains on listed equity shares and equity mutual funds (held over 12 months) 12.5% on gains above ₹1.25 lakh in a year
Short-term capital gains on listed equity shares and equity mutual funds 20%
Long-term capital gains on other assets such as property and gold (held over 24 months) 12.5% without indexation
Winnings from lotteries, game shows, online games and betting 30% flat
Income from transfer of virtual digital assets (crypto assets) 30% flat

Debt mutual funds bought after 1 April 2023 and certain similar investments are taxed at your slab rate and not at the rates above.

Deductions

The following popular deductions are mainly available in the old regime:

  • Section 80C: up to ₹1.5 lakh for specified investments and payments.
  • Section 80CCD(1B): an additional ₹50,000 for contributions to the National Pension System.
  • Section 80D: health insurance premium and medical expenses.
  • Section 80E: interest on an education loan.
  • Section 24(b): interest on a home loan.
  • Sections 80TTA and 80TTB: interest on savings accounts, and for senior citizens interest from deposits.

The employer’s contribution to NPS under section 80CCD(2) is allowed in both regimes, up to 10% of salary in the old regime and 14% in the new regime. Under the Income-tax Act, 2025 these deductions carry new section numbers.

Income Tax Return (ITR)

Who need not file a return

  • A person whose total income is within the basic exemption limit (₹4 lakh in the new regime, ₹2.5 lakh in the old regime for those below 60) and who does not fall under the other mandatory filing cases.
  • A resident senior citizen aged 75 or more who has only pension and interest income from the same bank, where the bank deducts tax on the person’s declaration.

ITR forms

  • ITR-1: resident individuals with income up to ₹50 lakh from salary, one house property and other sources, and long-term capital gains under section 112A up to ₹1.25 lakh.
  • ITR-2: individuals and HUFs with capital gains, income above ₹50 lakh or no business income.
  • ITR-3: individuals and HUFs with business or professional income.
  • ITR-4: resident individuals, HUFs and firms (other than LLPs) opting for presumptive taxation, with income up to ₹50 lakh.
  • ITR-5: firms, LLPs, AOPs and BOIs.
  • ITR-6: companies other than those claiming exemption under section 11.
  • ITR-7: trusts and institutions under specified sections.

Documents to keep ready

Form 16, Form 26AS, the Annual Information Statement (AIS) and Taxpayer Information Summary (TIS), bank statements and interest certificates, proof of deductions, and your bank account details.

Due dates

The due dates are fixed each year and can be extended by the CBDT. For AY 2026-27 the usual dates were:

Taxpayer Due date
Individuals and others not requiring audit 31 July 2026
Taxpayers whose accounts require audit 31 October 2026, extended to 21 November 2026
Taxpayers with transfer pricing reports 30 November 2026

For the audit extension see our note on the ITR deadline extension for AY 2026-27. Late filing attracts a fee and interest.

How tax is paid

  • Tax deducted at source (TDS): the payer deducts tax from salary, interest, rent, professional fees and similar payments and deposits it with the government.
  • Advance tax: payable in instalments if the tax liability for the year is ₹10,000 or more: 15% by 15 June, 45% by 15 September, 75% by 15 December and 100% by 15 March. Taxpayers under presumptive taxation pay in one instalment by 15 March.
  • Self-assessment tax: any balance tax paid before filing the return.

Final Word

Income tax rules change often, especially around the move to the Income-tax Act, 2025. Choose the regime that suits you each year, keep your records ready, meet the due dates and take advice from a qualified professional where needed.

Frequently asked questions

What is income tax?

Income tax is a direct tax charged on the income a person earns in a year. In India it is administered by the Central Board of Direct Taxes and levied under the Income-tax Act.

Which tax regime is the default?

The new tax regime is the default. An individual can opt for the old regime, which allows deductions such as section 80C but has higher slab rates.

Is income up to ₹12 lakh really tax free?

In the new regime, a resident individual with total income up to ₹12 lakh pays no tax because of the section 87A rebate of up to ₹60,000. Salaried taxpayers get a further ₹75,000 standard deduction. Special-rate capital gains are not covered by the rebate.

What is the due date for filing an income tax return?

For AY 2026-27 the due date was 31 July 2026 for taxpayers not requiring audit, and 31 October 2026 for audit cases, extended to 21 November 2026. Due dates are fixed each year and can be extended.

Official sources

Related reading

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

How to Save Tax on Salary from ₹7 Lakh to ₹1 Crore: Old vs New Regime (Tax Year 2026-27)

Last updated: 13 July 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • Under the new regime a salaried individual pays no tax on salary up to ₹12,75,000: the ₹75,000 standard deduction takes income to ₹12,00,000, and the section 156 rebate of up to ₹60,000 clears the tax.
  • Above that, the old regime wins only if your total deductions (including the ₹50,000 standard deduction) cross a break-even figure, about ₹5.9 lakh at a ₹15 lakh salary and about ₹8.5 lakh from ₹30 lakh upward.
  • In the new regime the useful levers are the employer’s NPS contribution (up to 14% of salary), tax-free perquisite limits and a correct salary structure.
  • Surcharge starts above ₹50 lakh of income and is capped at 25% in the new regime but goes to 37% above ₹5 crore in the old regime.

A salary of ₹7 lakh, ₹12 lakh, ₹20 lakh or ₹50 lakh calls for different advice. Below ₹12.75 lakh the question is whether any tax is payable at all. Above it, the question is whether your deductions are large enough to beat the new regime. This post gives the rules, the tax at each level and the break-even point, for tax year 2026-27 (income earned in FY 2026-27).

The figures are for a resident individual below 60 whose only income is salary, with 4% health and education cess, unless stated.

The two regimes in one table

Point New regime (section 202, default) Old regime
Slabs Up to ₹4,00,000 nil; ₹4,00,001 to ₹8,00,000 5%; ₹8,00,001 to ₹12,00,000 10%; ₹12,00,001 to ₹16,00,000 15%; ₹16,00,001 to ₹20,00,000 20%; ₹20,00,001 to ₹24,00,000 25%; above 30% Up to ₹2,50,000 nil; ₹2,50,001 to ₹5,00,000 5%; ₹5,00,001 to ₹10,00,000 20%; above ₹10,00,000 30%
Standard deduction ₹75,000 ₹50,000
Rebate (section 156) Tax or ₹60,000, whichever is less, if income is up to ₹12,00,000 (marginal relief above) Tax or ₹12,500, whichever is less, if income is up to ₹5,00,000
Chapter VIII deductions (section 123 and others) Not allowed, except employer’s NPS contribution (section 124(1) and (2)) and a few others Allowed
HRA exemption, LTA, interest on a self-occupied home loan Not allowed Allowed
Gratuity, leave encashment and similar exemptions Allowed Allowed
Surcharge 10% above ₹50 lakh, 15% above ₹1 crore, 25% above ₹2 crore 10%, 15%, 25% on the same slabs, and 37% above ₹5 crore

Slabs and the surcharge are from the Finance Act, 2026; the standard deduction, rebate and what is barred in the new regime are from sections 19, 156 and 202 of the Income-tax Act, 2025.

Salary up to ₹12.75 lakh: no tax in the new regime

A salary of ₹12,75,000 less the ₹75,000 standard deduction is ₹12,00,000. The slab tax on that is ₹60,000, and the section 156(2) rebate of ₹60,000 cancels it. No investment is needed to save tax on these salaries.

Marginal relief covers the next slice. The tax on income above ₹12,00,000 cannot exceed the excess over ₹12,00,000. On a salary of ₹12,85,000 the income is ₹12,10,000; slab tax is ₹61,500 but tax is limited to ₹10,000, plus 4% cess, so ₹10,400.

The rebate applies against slab-rate tax only; it does not reduce tax on special-rate income such as capital gains.

What the tax is at each level

Tax with cess. “Old regime” columns assume total deductions as shown, including the ₹50,000 standard deduction.

Salary New regime Old regime, deductions ₹2,00,000 Old regime, deductions ₹4,50,000 Total deductions needed for old regime to equal new
₹7,00,000 0 0 0 Not needed
₹10,00,000 0 ₹75,400 ₹23,400 New regime tax is nil
₹12,75,000 0 ₹1,40,400 ₹80,600 New regime tax is nil
₹15,00,000 ₹97,500 ₹2,10,600 ₹1,32,600 About ₹5.9 lakh
₹20,00,000 ₹1,92,400 ₹3,66,600 ₹2,88,600 About ₹7.6 lakh
₹30,00,000 ₹4,75,800 ₹6,78,600 ₹6,00,600 About ₹8.5 lakh
₹50,00,000 ₹10,99,800 ₹13,02,600 ₹12,24,600 About ₹8.5 lakh
₹1,00,00,000 ₹29,25,780 ₹31,48,860 ₹30,63,060 About ₹8.5 lakh

Reading the table: at ₹20 lakh you need roughly ₹7.6 lakh of total deductions and exemptions in the old regime before it beats the new regime. A typical set (standard deduction ₹50,000, ₹1,50,000 under section 123, ₹50,000 own NPS, ₹25,000 health insurance, some HRA and home loan interest) can reach it only if rent or loan interest is high. Above ₹30 lakh the break-even settles at about ₹8.5 lakh because both regimes reach the top 30% slab.

What works in the new regime

  1. Employer’s NPS contribution. The employer’s contribution to the notified pension scheme is deductible up to 14% of salary (basic plus dearness allowance) in the new regime (section 124(1) and (2)). It also counts toward the ₹7.5 lakh combined limit for employer contributions to PF, NPS and superannuation. This is the single most useful structuring lever, and it has to be set up with the employer before the contribution is made.
  2. Exempt items that are not barred. Gratuity and leave encashment on retirement, and many perquisites within the Rule 15 limits, stay tax free in both regimes.
  3. Do not restructure pay into HRA or LTA for tax. In the new regime the HRA exemption and similar allowance exemptions are not available, so these allowances are taxed like the rest of salary. Look at the employer-side components (NPS, tax-free perquisites) instead.
  4. Plan for the rebate edge. Between ₹12,75,000 and about ₹13.45 lakh of salary, each extra ₹1 of salary costs ₹1 of tax at the margin because of the marginal relief. An NPS contribution that brings income back under ₹12 lakh removes the tax entirely.

What works in the old regime

If you choose the old regime, build up these in this order:

  • Section 123 (earlier 80C), up to ₹1,50,000 in total: employee PF, tuition fees for two children, home loan principal, five-year bank or post office deposits, life insurance premiums and others listed in Schedule XV.
  • HRA exemption if you pay rent and receive HRA, or the rent deduction if you receive none.
  • Interest on a home loan on a self-occupied house.
  • Own NPS contribution up to ₹50,000 (section 124(3)), above the section 123 limit.
  • Health insurance premium, education loan interest and donations to eligible funds.

See our posts on these deductions for the limits. Do not invest only to save tax: a lock-in product bought for a deduction is only worth it if you need the product.

High salaries: ₹50 lakh to ₹1 crore

  • Surcharge starts when income is above ₹50 lakh, at 10% of the tax. Marginal relief means the tax and surcharge together cannot exceed the tax at ₹50 lakh plus the income above it.
  • At ₹1 crore of salary the new regime has taxable income of ₹99,25,000, so the 10% surcharge applies; from ₹1 crore the rate rises to 15%.
  • The old regime’s top surcharge is 37% above ₹5 crore, but for most salaried people the gap is the ₹8.5 lakh break-even above, not the surcharge.
  • Income other than salary (capital gains, interest, business) adds to total income and can push you across a surcharge line.

A quick way to decide

  1. List your actual deductions: employee PF, section 123 investments, rent paid and HRA received, home loan interest, own NPS, health insurance.
  2. Add ₹50,000 standard deduction. If the total is below the break-even for your salary in the table, choose the new regime.
  3. If above, compute both exactly. The break-even is a guide; the surcharge, other income and the age of the taxpayer change it.
  4. Read the option rules in section 202 before you file, and tell your employer early which regime to use for TDS so that the tax deducted during the year is close to your final tax.

Frequently asked questions

How much salary is tax free in the new regime?

Up to ₹12,75,000 for a salaried person, for tax year 2026-27. The ₹75,000 standard deduction reduces it to ₹12,00,000 of income, and section 156(2) gives a rebate of the tax or ₹60,000, whichever is less.

What if my income is a little above ₹12 lakh?

Marginal relief applies. The tax cannot exceed the amount by which income is above ₹12,00,000. At an income of ₹12,10,000 the tax is limited to ₹10,000 plus cess.

Which regime is better for a ₹20 lakh salary?

For most people the new regime, unless total deductions (standard deduction, section 123 investments, HRA, home loan interest, own NPS and others) are above about ₹7.6 lakh. Compute both with your own figures.

Is the old regime ever better?

Yes, when deductions and exemptions are large, for example HRA with a high rent, home loan interest and the full section 123 limit together.

What still works in the new regime?

The ₹75,000 standard deduction, the employer’s contribution to NPS (up to 14% of salary under section 124), exemptions such as gratuity and leave encashment, and the perquisite limits.

When does surcharge apply?

When income is above ₹50 lakh: 10% up to ₹1 crore, 15% up to ₹2 crore and 25% above that. In the old regime it is 37% above ₹5 crore. Marginal relief applies at each threshold.

Official sources

Related reading

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

Conveyance Allowance: Exemption Limit, Calculation and Eligibility

Last updated: 06 August 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • Conveyance allowance is exempt to the extent of the amount you actually spend on travel in the performance of your official duties, in both the old and the new tax regime.
  • It applies only if your employer does not give you a free conveyance, and the part not spent is taxable.
  • The old ₹1,600 a month fixed exemption is not conveyance allowance: it was a transport allowance for commuting and ended in FY 2018-19.
  • From Tax Year 2026-27 the rule is in Schedule III of the Income-tax Act, 2025 and Rule 280(1)(d) of the Income-tax Rules, 2026.

Conveyance allowance is paid to an employee to meet the cost of travel done in the course of official work, such as visiting clients or sites. It is exempt from tax up to what you actually spend on such travel. There is no fixed rupee limit.

Where is this in the law?

Up to FY 2025-26 it was section 10(14)(i) of the Income-tax Act, 1961 and Rule 2BB(1)(b). From Tax Year 2026-27 it is in Schedule III of the Income-tax Act, 2025 (Table Sl. No. 12), with Rule 280(1)(d) of the Income-tax Rules, 2026 describing it as an allowance granted to meet the expenditure on conveyance in performance of duties of an office or employment of profit, where no free conveyance is provided by the employer.

How much is exempt?

The lower of:

  • the allowance you receive, and
  • the amount you actually spend on conveyance for official duties.

The unspent part is taxable as salary. Keep records of your official journeys, such as a log, fuel bills, tickets or cab receipts, as your employer may ask for them.

The ₹1,600 myth

Many articles say conveyance allowance is exempt up to ₹1,600 a month (₹19,200 a year). That figure belonged to the transport allowance for commuting between home and office, which was withdrawn from FY 2018-19 when the standard deduction was introduced. It is not a conveyance allowance limit. A fixed monthly “conveyance” amount that you use only to commute to work is therefore taxable.

Conveyance allowance vs transport allowance

Basis Conveyance allowance Transport allowance
Purpose Travel while doing the job Travel between home and office
Exemption Actual expense, up to the allowance Only for disabled employees and transport business employees
Regimes Both old and new Disability: both. Transport business: old only

Who is eligible?

Any employee who has to travel for official work, and whose employer does not provide a free conveyance. If the employer gives a company car or free transport, no exemption is allowed.

Reporting

Your employer applies the exemption in Form 16, based on the declaration and proof you give. In your return, show the exempt and taxable parts in the salary schedule.

Old regime or new regime?

Conveyance allowance (for travel in the performance of duties) is one of the few allowances that continue to be exempt in the new regime. Under section 202 of the Income-tax Act, 2025 and Rule 280(3), the new regime keeps the exemption for allowances for travel on tour or transfer, daily charges, conveyance in duties and, for a disabled employee, the transport allowance.

Frequently asked questions

What is the exemption limit for conveyance allowance?

There is no fixed limit. The exemption is the actual amount you spend on conveyance in performing your duties, up to the allowance you receive.

Is conveyance allowance taxable?

The part you do not spend on official travel is taxable as salary. A fixed allowance you use for commuting is taxable.

Is it available in the new tax regime?

Yes. It is one of the allowances that remain exempt in the new tax regime.

Is conveyance allowance the same as transport allowance?

No. Conveyance allowance is for travel in performing duties. Transport allowance is for travel between home and office.

Can I claim it if my employer gives a company car?

No. It applies only where no free conveyance is provided by the employer.

Official sources

Related reading

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

Standard Deduction for Salaried Individuals in New and Old Tax Regime

Last updated: 15 September 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • The standard deduction is a flat amount subtracted from salary or pension income without any proof of expenses.
  • It is ₹75,000 in the new tax regime and ₹50,000 in the old regime, and cannot exceed your salary or pension income.
  • For family pension the deduction is ₹25,000 in the new regime and ₹15,000 in the old regime.
  • From Tax Year 2026-27 it is allowed under section 19 of the Income-tax Act, 2025.

The standard deduction is a fixed amount that salaried employees and pensioners can subtract from their income without producing any bills or proof. It was removed years ago, brought back in Budget 2018, and has been increased since, most recently in the new regime to ₹75,000.

Amount of standard deduction

Regime Salary or pension Family pension
New tax regime (default) ₹75,000 ₹25,000
Old tax regime ₹50,000 ₹15,000

In each case the deduction cannot exceed the salary or pension you actually received. These amounts apply to FY 2025-26 and to Tax Year 2026-27. The Union Budget 2026 did not change income tax rates or slabs for Tax Year 2026-27, and the standard deduction stayed as it was.

Which section gives it?

For FY 2025-26 (assessment year 2026-27) it is section 16(ia) of the Income-tax Act, 1961, whose proviso substituting ₹75,000 for the new regime applies from 01/04/2025. For Tax Year 2026-27 onwards it is section 19 of the Income-tax Act, 2025, which lists all the deductions from salary in one place.

Who can claim?

  • Employees who earn salary income, in private or government jobs.
  • Pensioners, since pension is taxed as salary.
  • Recipients of family pension, at the lower family pension amount.

It is not available for business or professional income, or to someone with no salary or pension.

Why does it matter?

  • It reduces taxable income automatically, so it lowers the tax of nearly every salaried person.
  • No documents are needed.
  • It is available in both regimes, so it does not change the choice between them, but the new regime’s higher amount is one reason many salaried taxpayers find it cheaper.

Example

Ms C earns a salary of ₹9,00,000 in FY 2025-26 and has no other income. In the new regime her taxable income is ₹9,00,000 less ₹75,000, which is ₹8,25,000. In the old regime it would be ₹8,50,000 before any other deductions.

What about the documents for filing the return?

You need no proof for the standard deduction. For the return as a whole, you should still keep Form 16, Form 26AS, the AIS and any proofs for other deductions you claim.

Frequently asked questions

What is the standard deduction for salaried employees?

₹75,000 in the new tax regime and ₹50,000 in the old tax regime, or the amount of your salary if that is less.

Do I need documents to claim the standard deduction?

No. It is allowed automatically on salary and pension income, without proof of any expense.

Can pensioners claim the standard deduction?

Yes. Pension is taxed as salary, so pensioners can claim it. Family pension has a separate deduction of ₹25,000 in the new regime and ₹15,000 in the old regime.

Can a self-employed person claim the standard deduction?

No. It is only for income taxed as salary or pension.

Which section gives the standard deduction now?

Section 19 of the Income-tax Act, 2025 from Tax Year 2026-27. Earlier it was section 16(ia).

Official sources

Related reading

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

Income Tax Rebate Under Section 87A

Last updated: 17 July 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • Section 87A gives resident individuals a rebate of up to ₹60,000 in the new regime for total income up to ₹12 lakh, so no tax is payable.
  • In the old regime the rebate is up to ₹12,500 for total income up to ₹5 lakh.
  • Marginal relief in the new regime protects taxpayers whose income is only slightly above ₹12 lakh; the old regime has none.
  • The rebate is not available against tax on special-rate capital gains in the new regime, and it is calculated before the 4% cess.

How the section 87A rebate works

1. Compute total income after the deductions allowed in your regime
↓
2. Check the limit: ₹12 lakh in the new regime, ₹5 lakh in the old regime
↓
3. Compute tax on the slab rates before cess
↓
4. Rebate is the lower of the tax and ₹60,000 (new) or ₹12,500 (old)
↓
5. If income is just above ₹12 lakh in the new regime, apply marginal relief
↓
6. Add 4% health and education cess on the tax that remains

A rebate under section 87A is a reduction in tax for resident individuals whose total income is within a set limit. Under the new tax regime the rebate is up to ₹60,000 for a total income up to ₹12 lakh, so no tax is payable. Under the old tax regime the rebate is up to ₹12,500 for a total income up to ₹5 lakh. These limits applied to FY 2025-26 (AY 2026-27). Budget 2026 did not change the slab rates, so the same limits are being applied for Tax Year 2026-27.

What is Rebate Under Section 87A?

  • The rebate is a relief for low and middle income earners. It is available only to resident individuals.
  • It reduces the income tax payable, calculated on the slab rates before adding the 4% health and education cess.
  • If the rebate equals the tax payable, the taxpayer pays no income tax at all.
  • It is not available to HUFs, companies, firms or non-residents.

Eligibility Criteria for Rebate

  1. Only resident individuals are eligible.
  2. The total income, after the deductions allowed in the regime chosen, must not exceed:
    - ₹12 lakh under the new tax regime, or
    - ₹5 lakh under the old tax regime.
  3. The rebate is the lower of the limit (₹60,000 or ₹12,500) and the tax payable before cess.
  4. Under the new regime the rebate cannot be used against tax on capital gains taxed at special rates (sections 111A, 112 and 112A).

Section 87A Rebate Limit: New vs Old Tax Regime

Particulars New regime Old regime
Total income limit ₹12,00,000 ₹5,00,000
Maximum rebate ₹60,000 ₹12,500
Standard deduction for salaried and pensioners ₹75,000 ₹50,000
Marginal relief available Yes No

Because the standard deduction in the new regime is ₹75,000, a salaried taxpayer with a salary of up to ₹12,75,000 and no other income has a taxable income of ₹12 lakh or less and pays no tax.

Why ₹12 lakh gives nil tax in the new regime

Slab Rate Tax
Up to ₹4,00,000 Nil 0
₹4,00,001 to ₹8,00,000 5% 20,000
₹8,00,001 to ₹12,00,000 10% 40,000
Total tax on ₹12,00,000 60,000
Less: rebate 60,000
Tax payable 0

How to Claim the Rebate

  1. Calculate your gross total income for the year.
  2. Reduce the deductions allowed in the regime you have chosen.
  3. Arrive at your total income and compare it with the limit (₹12 lakh or ₹5 lakh).
  4. File your return with the correct income and deductions.
  5. The income tax portal calculates the rebate automatically if your income is within the limit.

Examples

1. New tax regime

Particulars Amount (₹)
Total income 12,00,000
Tax as per slab rates 60,000
Less: rebate under section 87A 60,000
Tax payable 0

Deductions such as section 80C are not available in the new regime.

2. Old tax regime

Particulars Amount (₹)
Gross total income 6,50,000
Less: deduction under section 80C 1,50,000
Total income 5,00,000
Tax as per slab rates 12,500
Less: rebate under section 87A 12,500
Tax payable 0

Incomes Not Eligible for the Rebate

The rebate cannot be claimed against tax on:

  • Long-term capital gains under section 112A and other capital gains taxed at special rates (new regime).
  • Short-term capital gains on listed equity under section 111A (new regime).
  • Income taxed at special rates, such as winnings from lotteries and games.

Marginal Relief in the New Tax Regime

If the total income is slightly above ₹12 lakh, the tax can be higher than the extra income earned above ₹12 lakh. Marginal relief makes sure the tax payable is not more than that extra income.

How to calculate it:

  1. Find the excess over ₹12 lakh (total income minus ₹12,00,000). Call it A.
  2. Compute the tax on the total income before cess. Call it B.
  3. If B is more than A, the rebate is B minus A, and the tax payable equals A.

Example

Mr. Ravi, a resident, has a total income of ₹12,15,000 in the new tax regime.

Step Amount (₹)
Excess over ₹12,00,000 (A) 15,000
Tax on ₹12,15,000 before cess (B): 60,000 on the first ₹12 lakh plus 15% of 15,000 62,250
Rebate (B minus A) 47,250
Tax payable before cess (equal to the excess income of ₹15,000) 15,000
Add: health and education cess at 4% 600
Total tax liability 15,600

The old regime has no marginal relief, so a taxable income just above ₹5 lakh loses the whole ₹12,500 rebate at once.

Section 87A and the Income-tax Act, 2025 (now section 156)

The Income-tax Act, 2025 applies from 1 April 2026, and the rebate of section 87A is now in section 156. Sub-section (1) gives the rebate of up to ₹12,500 where total income does not exceed ₹5 lakh. Sub-section (2) gives the rebate of up to ₹60,000 where total income does not exceed ₹12 lakh and the tax is computed on the new regime slab rates of section 202. For income earned up to 31 March 2026 (FY 2025-26, AY 2026-27) the Income-tax Act, 1961 and its section 87A still apply. The rules described here are the same under both Acts.

Frequently asked questions

Who can claim the rebate under section 87A?

Only resident individuals whose total income is within ₹12 lakh in the new tax regime or ₹5 lakh in the old tax regime. HUFs, companies, firms and non-residents cannot claim it.

How much is the section 87A rebate?

Up to ₹60,000 in the new tax regime and up to ₹12,500 in the old tax regime, limited to the tax payable before cess.

Is there tax if my income is ₹12 lakh in the new regime?

No. Tax on ₹12 lakh is ₹60,000 and the rebate of ₹60,000 brings it to nil. A salaried taxpayer with a salary up to ₹12,75,000 also pays no tax after the ₹75,000 standard deduction.

What is marginal relief on the rebate?

If income is slightly above ₹12 lakh in the new regime, marginal relief limits the tax to the amount of income above ₹12 lakh. The old regime has no marginal relief.

Official sources

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Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.