Tag: Section 87A

Difference Between Exemption, Deduction and Rebate in Income Tax

Posted on by CA Meet Dhrangadhariya

Last updated: 29 July 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • An exemption keeps a particular income out of tax altogether, a deduction reduces your taxable income, and a rebate reduces the tax you have to pay.
  • Examples: agricultural income is exempt, section 80C is a deduction, and the section 87A rebate cuts your computed tax.
  • For Tax Year 2026-27 the new regime gives a rebate of up to ₹60,000 if taxable income is up to ₹12 lakh; the old regime gives up to ₹12,500 if income is up to ₹5 lakh.
  • Most exemptions and deductions (HRA, 80C, 80D) work only in the old regime.

Exemption, deduction, rebate and relief are often used as if they mean the same thing. They do not. Each works at a different stage of the tax calculation, and knowing which is which helps you plan your tax and read your Form 16 correctly.

Exemption

An exemption makes a particular income tax-free. That income is left out of your total income, so it never enters the calculation.

Examples:

  • Agricultural income.
  • House rent allowance (HRA), within the prescribed limit, in the old regime.
  • Leave travel allowance (LTA), on the conditions of the rules, in the old regime.
  • Scholarships granted to meet the cost of education.
  • Gratuity and leave encashment on retirement, up to the limits allowed.

In the Income-tax Act, 2025, which applies from 01/04/2026, most of these exemptions are listed in the Schedules to the Act, while the old section 10 no longer exists as a single section.

Deduction

A deduction is an amount you subtract from your income, because you invested in or spent on something the law encourages. It reduces your taxable income, so the tax saved depends on your slab rate.

Examples:

  • Standard deduction on salary and pension.
  • Section 80C: up to ₹1.5 lakh for PPF, ELSS, life insurance and more.
  • Section 80D: health insurance premium. In the old regime, up to ₹25,000 for self, spouse and children (₹50,000 if a senior citizen), and the same again for parents.
  • Section 80E: interest on an education loan.
  • Section 24(b): home loan interest, up to ₹2 lakh for a self-occupied house.

Rebate

A rebate reduces the tax itself, after it has been computed on your taxable income. The main one is section 87A, available to resident individuals.

New regime (default) Old regime
Taxable income limit ₹12,00,000 ₹5,00,000
Maximum rebate ₹60,000 ₹12,500

These limits apply to Tax Year 2026-27 and to FY 2025-26. Marginal relief is available in the new regime for income slightly above ₹12 lakh. The rebate does not apply to special rate income, such as tax on short term capital gains under section 111A, so read the conditions before relying on it. See our article on the section 87A rebate for a full explanation.

Exemption vs deduction vs rebate: comparison table

Feature Exemption Deduction Rebate
Meaning A specific income is tax-free An amount subtracted from income An amount subtracted from tax
Stage Before total income is arrived at Before taxable income is arrived at After tax is computed
Effect Income is not taxed at all Reduces taxable income Reduces tax payable
Examples Agricultural income, HRA Section 80C, 80D, 80E Section 87A
Most are available in Mostly the old regime Mostly the old regime Both regimes

A note on tax deducted at source (TDS) and tax relief

Rebate, deduction and exemption are not the same as TDS. TDS is tax collected in advance by the payer, such as an employer or bank, on salary, interest, commission, rent or professional fees. It is later adjusted against your final tax, and any excess is refunded to you.

“Tax relief” is a general term for any provision that lowers your tax, including the three above and relief for double taxation. “Tax benefit” is used in the same loose way.

Which is better?

All three help, but they act differently. An exemption removes income completely. A deduction saves tax at your slab rate. A rebate saves a fixed amount of tax. Because most deductions and exemptions work only in the old regime, compare your tax under both regimes every year.

Frequently asked questions

What is the difference between a deduction and an exemption?

An exemption excludes a specific income from tax, for example agricultural income. A deduction is subtracted from your income, for example the section 80C deduction, to reach taxable income.

What is a tax rebate?

A rebate reduces the tax computed on your taxable income. Section 87A is the common example.

Is a rebate the same as a refund?

No. A rebate cuts your tax liability before you pay. A refund is money returned to you when your tax paid or deducted is more than your tax liability.

Which comes first in the calculation?

Exemptions are left out of income first, then deductions are subtracted, tax is calculated on the taxable income, and the rebate is applied to that tax.

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

Posted on by CA Meet Dhrangadhariya

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

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.