Section 87A Rebate Under Updated Slabs: Are Incomes Up to ₹4 Lakh Effectively Tax‑Free in FY 2026‑27?
Yes, under the updated slabs and Section 87A in the new tax regime, incomes up to ₹4 lakh are effectively tax‑free in FY 2026‑27 for resident individuals, and in fact the zero‑tax window now extends much further – up to ₹12 lakh of “normal” income, subject to conditions.
What Has Changed in Section 87A
Section 87A is a tax rebate provision that reduces your calculated income tax to zero up to a specified income threshold. Under the old regime, this threshold has long been linked to taxable income up to ₹5 lakh with a maximum rebate of ₹12,500. Under the new regime, post‑Budget 2025 and carried forward into FY 2026‑27, the threshold has been significantly raised – taxable income up to ₹12 lakh now enjoys a rebate of up to ₹60,000, making the tax liability nil for eligible resident individuals.
Updated Slabs in the New Tax Regime
From FY 2025‑26 onwards, the new tax regime’s slab structure was revised and continues unchanged into FY 2026‑27. The basic exemption limit under the new regime is now ₹4 lakh – income up to this level attracts a 0% rate even before applying any rebate. Above this, tax applies progressively: 5% between ₹4 lakh and ₹8 lakh, 10% between ₹8 lakh and ₹12 lakh, and higher rates for higher income bands. Because Section 87A wipes out up to ₹60,000 of tax under the new regime, total “normal” income up to ₹12 lakh effectively becomes tax‑free for eligible taxpayers.
Are Incomes up to ₹4 Lakh Effectively Tax‑Free?
For FY 2026‑27, under the new tax regime, income up to ₹4 lakh is completely outside the tax net due to the nil rate on the first slab. At this level, you do not even need Section 87A to bring your tax liability to zero since the computed tax is already nil. Once your income crosses ₹4 lakh, tax begins at 5%, but as long as your total taxable income stays within ₹12 lakh and you are a resident individual under the new regime, Section 87A can fully offset this tax.
How the “Zero Tax up to ₹12 Lakh” Works
Budget 2025 explicitly aimed to ensure no tax is payable on normal income up to ₹12 lakh under the new regime by combining a higher basic exemption limit with an enhanced Section 87A rebate. The slabs are structured so that tax for income between ₹4 lakh and ₹12 lakh is exactly ₹60,000, and the rebate under Section 87A in the new regime is also capped at ₹60,000, resulting in a net tax of zero. For salaried individuals, the standard deduction under the new regime has been increased to ₹75,000, effectively making salary income up to around ₹12.75 lakh tax‑free after factoring in this deduction and the rebate.
New Regime vs Old Regime: Rebate Differences
The operation of Section 87A differs sharply between the old and new regimes. Under the old regime, the rebate is limited to ₹12,500 and applies only where total taxable income does not exceed ₹5 lakh, making that income range effectively tax‑free. Under the new regime, the rebate ceiling is ₹60,000 and kicks in for taxable income up to ₹12 lakh, offering much broader relief to middle‑income earners who opt out of most deductions and exemptions.
Key Comparison for FY 2026‑27
| Aspect | Old Regime | New Regime |
|---|---|---|
| Basic exemption limit | Up to ₹2.5 lakh (individual below 60) | Up to ₹4 lakh |
| Max rebate u/s 87A | ₹25,000 in FY 2026‑27 (raised from earlier ₹12,500) | ₹60,000 |
| Income effectively tax‑free via rebate | Up to ₹5 lakh | Up to ₹12 lakh (normal income) |
| Standard deduction | Available, varying for salary/pension | ₹75,000 for salaried in FY 2025‑26 onward |
Who Can Claim the Section 87A Rebate
Section 87A applies only to resident individuals – it does not cover HUFs, NRIs, companies, or firms. The rebate is granted after calculating the tax on total income but before adding health and education cess, and it is restricted to the amount of tax payable (it cannot create a negative tax or refund by itself). Under the new regime, the enhanced rebate up to ₹60,000 is available where total income chargeable under Section 115BAC(1A) does not exceed ₹12 lakh, and marginal relief is used when income is slightly above this threshold to avoid a sharp tax jump.
What Counts as “Normal” Income for Rebate
The zero‑tax benefit up to ₹12 lakh under the new regime is intended for normal income, such as salary, professional fees, business income taxed at slab rates, and interest that is not subject to special rates. Incomes taxed at special rates – for example, certain short‑term capital gains on listed equity under Section 111A, long‑term capital gains under Section 112A, winnings from games or lotteries, and specified digital asset gains – are generally excluded from the enhanced rebate under the new regime. At the same time, some capital gains taxed at slab rates (such as on unlisted shares or real estate in particular situations) can still benefit from Section 87A if the total income including them remains within the ₹12 lakh ceiling.
Practical Example: Income up to ₹4 Lakh
Consider a resident individual under the new regime with total income of ₹4 lakh and no special‑rate income. Under the revised slabs, the tax rate on this entire income band is 0%, so the computed tax is already nil. Since Section 87A operates as a rebate from tax and not from income, there is no tax to rebate in this situation – the income is effectively tax‑free purely because of the nil slab. Thus, for FY 2026‑27, you can say that incomes up to ₹4 lakh are tax‑exempt under the new regime’s slab structure without invoking Section 87A, while Section 87A becomes relevant only once you move beyond ₹4 lakh.
Example: Income Between ₹4 Lakh and ₹8 Lakh
Now consider a resident individual opting for the new regime with income of ₹6 lakh and no special‑rate income. Tax is computed as 0% on the first ₹4 lakh and 5% on the remaining ₹2 lakh, resulting in a basic tax of ₹10,000 before cess. Under Section 87A’s new‑regime rule, since total income is less than ₹12 lakh, you can claim a rebate up to ₹60,000, which fully cancels the ₹10,000 tax, leaving net tax payable at zero. This illustrates how the rebate operates above ₹4 lakh and confirms that incomes even well beyond ₹4 lakh remain effectively tax‑free as long as they stay within the ₹12 lakh ceiling.
Example: Salaried Individual Around ₹12.75 Lakh
For salaried taxpayers in the new regime, the standard deduction of ₹75,000 was introduced along with the revised slabs and rebate. Suppose your gross salary is ₹12.75 lakh; after applying the standard deduction, your taxable income falls to ₹12 lakh. Tax is computed at the applicable slab rates, yielding a liability of ₹60,000 before cess, which is then fully neutralised by the Section 87A rebate under the new regime. This is why many explanations state that salaried individuals can have “no tax up to ₹12.75 lakh” under the new regime, provided their income is normal and not dominated by special‑rate components.
Why Some Incomes Below ₹12 Lakh Still Face Tax
Despite the headline of “zero tax up to ₹12 lakh,” certain taxpayers can still see tax demands even when their declared income is below this threshold. One reason is the presence of special‑rate incomes that are excluded from rebate, such as specified capital gains or winnings, which can create tax liability even when normal income is within ₹12 lakh. Another reason arises from interest, late fees, or demands under Section 156, where past‑year issues or adjustments lead to payable amounts even though current‑year income would otherwise qualify for the rebate.
Strategic Choice: New Regime or Old Regime
Choosing between regimes for FY 2026‑27 involves balancing the broad zero‑tax coverage of the new regime against the deductions and exemptions available in the old regime. If your taxable income after deductions under the old regime is around or below ₹5 lakh, Section 87A can still make your tax liability zero, which benefits low‑income taxpayers who rely heavily on deductions like Section 80C, 80D, and housing loan interest. On the other hand, if you have limited deductions and your income lies between ₹5 lakh and ₹12 lakh, the new regime with its enhanced Section 87A rebate usually provides a clearer path to zero tax, making it attractive to salaried professionals and small business owners with straightforward income structures.
Implications for Tax Planning in FY 2026‑27
For FY 2026‑27, the stability of the revised slabs and Section 87A rules gives individuals a predictable framework to plan their taxes. Middle‑income earners can structure their finances with the understanding that, under the new regime, keeping normal income within ₹12 lakh and avoiding large special‑rate gains can result in zero tax through the rebate mechanism. Employers, payroll teams, and financial advisors in cities like Lucknow and across India are increasingly defaulting employees into the new regime, then evaluating whether an opt‑out to the old regime makes sense based on each person’s deduction profile.
So, Are Incomes up to ₹4 Lakh Tax‑Free in FY 2026‑27?
Under the updated slabs in the new tax regime, incomes up to ₹4 lakh are indeed effectively tax‑free for FY 2026‑27, thanks to the nil rate on the first slab and independent of Section 87A. More importantly, Section 87A now extends the zero‑tax zone far beyond ₹4 lakh so that resident individuals with normal income up to ₹12 lakh (and salaried individuals up to around ₹12.75 lakh after standard deduction) pay no tax under the new regime, provided their income is eligible and they file their return correctly.
