Section 87A Rebate & Marginal Relief — How Much Tax You Actually Save

Section 87A Rebate & Marginal Relief — How Much Tax You Actually Save

The Section 87A rebate is the single biggest reason so many salaried Indians now pay zero income tax. But it comes with rules that trip people up — especially around capital gains and the exact income threshold. Here’s how it really works.

What the Rebate Does

The rebate directly reduces your tax payable (not your taxable income) by a fixed amount, provided your total income doesn’t exceed a threshold:

If your computed tax is less than the rebate limit, the rebate simply equals your tax — bringing your final liability to zero. If your income exceeds the threshold, even by ₹1, the rebate is not available at all — which is where marginal relief comes in.

The Cliff Problem — And How Marginal Relief Fixes It

Without marginal relief, someone earning ₹12,00,001 under the new regime would suddenly owe tax on the entire slab structure, while someone earning ₹12,00,000 pays nothing — a massive, unfair jump for a ₹1 difference in income. Marginal relief caps the tax payable at the amount by which income exceeds the threshold, so the increase in tax never exceeds the increase in income.

Example

An individual with ₹12,10,000 taxable income (new regime): normal tax computation might work out to roughly ₹61,500. Since income exceeds ₹12,00,000 by only ₹10,000, marginal relief caps the tax payable at ₹10,000 (plus applicable cess) — not the full ₹61,500.

What the Rebate Does NOT Cover

•             Capital gains taxed at special rates (STCG at 20%, LTCG at 12.5%) are excluded from the rebate calculation, even if your overall income is below the threshold.

•             Lottery winnings, crypto/VDA gains (taxed flat at 30%) are similarly excluded.

•             The rebate applies only to resident individuals — not to non-resident individuals, HUFs, firms, or companies.

Frequently Asked Questions

Q1. If my salary is ₹10 lakh but I also have ₹3 lakh in equity LTCG, is my total income still rebate-eligible? No — while your salary portion benefits from the rebate mechanism if total income stays under the threshold, the LTCG portion is taxed at the flat 12.5% rate regardless, and doesn’t get “wiped out” by the rebate even if your overall income is modest.

Q2. Does marginal relief apply automatically, or do I need to calculate it myself? It’s built into the income tax e-filing utility and most payroll software — you don’t need to compute it manually, but understanding it helps you sanity-check your tax computation.

Q3. Can I claim the ₹60,000 rebate under the old regime? No — the ₹60,000 rebate is specific to the new regime (Section 156(2)). Under the old regime, the maximum rebate is ₹12,500, applicable only if income doesn’t exceed ₹5,00,000.

Figures reflect Tax Year 2026-27. Rebate thresholds are revised through the Union Budget from time to time.