Section 87A Rebate
Section 87A of the Income Tax Act provides a rebate against tax payable by resident individuals whose total income does not exceed a specified threshold — effectively making them tax-free up to that limit.
Understanding Section 87A Rebate
Section 87A is the mechanism that makes the new regime's "₹7 lakh tax-free" promise work mathematically. Without 87A, income of ₹7 lakh under the new regime would attract approximately ₹25,000 of tax. The rebate exactly offsets this, taking effective tax to zero.
The rebate is applied AFTER computing tax including surcharge — but it cannot be more than the actual tax payable. So someone with ₹6 lakh income (tax of ₹15,000) gets a ₹15,000 rebate — not the full ₹25,000. The rebate is non-refundable; you cannot get cash back if your tax is zero.
Why it matters
For first-time taxpayers, the Section 87A rebate is what makes ₹7 lakh income tax-free under the new regime — a powerful messaging tool but also a practical reality. If your total income is around ₹7–8 lakh, the new regime is almost always the right choice unless you have very high deductions. Cross the ₹7 lakh threshold by even ₹1, and you lose the rebate (with marginal relief provisions cushioning the cliff effect).
Example
Salaried earner with ₹7.5 lakh CTC under the new regime. Standard deduction ₹75,000 brings taxable income to ₹6.75 lakh. Tax computed: ₹22,500. Section 87A rebate: ₹22,500 (capped at actual tax payable). Net tax: ₹0. They pay no income tax despite a ₹7.5 lakh CTC.
Salaried earner with ₹7.5 lakh CTC under the new regime. Standard deduction ₹75,000 brings taxable income to ₹6.75 lakh. Tax computed: ₹22,500. Section 87A rebate: ₹22,500 (capped at actual tax payable). Net tax: ₹0. They pay no income tax despite a ₹7.5 lakh CTC.