Section 87A Rebate Explained: Who Actually Pays Zero Tax This Year

The Section 87A rebate is easy to misdescribe, and the shorthand version — "income up to ₹12 lakh is tax-free under the new regime" — leads to a real misunderstanding about what happens just above that line.

How it actually works

The rebate isn’t an exemption or a higher slab boundary. Tax is still calculated slab-by-slab exactly as normal — 5% from ₹4L to ₹8L, 10% from ₹8L to ₹12L, and so on. The rebate then wipes out that entire calculated tax amount, but only if your taxable income doesn’t exceed ₹12,00,000. Cross that line, even by ₹1, and the rebate disappears entirely — you owe tax on the full slab calculation, not just the amount above ₹12L.

Marginal relief softens the cliff edge

Because losing the rebate entirely at ₹12,00,001 would mean a ₹1 increase in income costing roughly ₹61,500 in tax, the law provides marginal relief: your tax liability is capped at the amount your income exceeds ₹12,00,000 by. So at ₹12,10,000 taxable income, tax is limited to roughly ₹10,000 rather than the full slab-calculated amount — the relief tapers off as income rises further past the threshold, until the two calculations converge.

The old regime version

The old regime has the same mechanism at a lower threshold — ₹5,00,000 taxable income — with its own marginal relief just above that line. It’s the same shape, just a different cutoff.

This is exactly the kind of threshold effect that’s easy to get wrong by hand and worth double-checking — our Income Tax Calculator applies the rebate correctly for both regimes so you can see your actual liability rather than the rounded version of the rule.