Under the new tax regime, a resident individual whose total income does not exceed ₹12,00,000 pays no income tax, because the section 87A rebate (₹60,000 at most) wipes out the slab tax on that income. Three things break this simple picture. The rebate covers only tax computed at the regime's slab rates, so tax on equity capital gains still has to be paid. Above ₹12 lakh there is no cliff but a narrow marginal relief band that ends at about ₹12.7 lakh. And the limit is tested on total income after deductions, not on salary or gross receipts.
Which provision applies depends on the year. For FY 2025-26 (assessment year 2026-27) the rebate sits in section 87A of the Income-tax Act, 1961. For tax year 2026-27 onwards it sits in section 156 of the Income-tax Act, 2025, which repeats the same amounts and the same slab-rate cap. The figures below are as they stood on 25 October 2026.
The two rebates and who can claim them
There are really two rebates, and they apply in different situations:
| Point | Rebate for income up to ₹5 lakh | Rebate for income up to ₹12 lakh |
|---|---|---|
| Who | Resident individual | Resident individual taxed at the new regime rates |
| Income limit | Total income up to ₹5,00,000 | Total income up to ₹12,00,000, with marginal relief above it |
| Maximum rebate | ₹12,500 | ₹60,000 |
| FY 2025-26 (AY 2026-27) | Section 87A, main clause | First proviso to section 87A (new regime under section 115BAC(1A)) |
| Tax year 2026-27 onwards | Section 156(1) | Section 156(2) and (3), for income taxed under section 202(1) |
In practice the ₹12,500 rebate matters to people who have opted for the old regime. The ₹60,000 rebate is the one most salaried employees, freelancers and small traders now rely on, because the new regime is the default.
Both rebates are for resident individuals only. The e-filing validation rules for ITR-2 for AY 2026-27 say so in plain terms: rule 533 states that the rebate is not allowed to a non-resident, and rule 534 that it is not allowed to an HUF. A resident but not ordinarily resident individual counts as resident for this purpose. Firms, companies and LLPs never get it. The rules are in the ITR-2 validation rules for AY 2026-27.
What the law actually says about the ₹12 lakh limit
Section 156 of the Income-tax Act, 2025 applies to a resident individual whose total income is chargeable under section 202(1). Where total income does not exceed ₹12 lakh, it allows a deduction from income tax of 100% of the tax or ₹60,000, whichever is less. Sub-section (3) then adds the limit that catches people out: the deduction "shall not exceed income-tax payable as per the rates provided in section 202(1)". The 1961 Act version for AY 2026-27, in section 87A as amended by the Finance Act, 2025, has the same structure, with the cap tied to the rates in section 115BAC(1A).
The new regime slabs, in section 202(1) of the 2025 Act and identical for AY 2026-27, are nil up to ₹4,00,000, then 5%, 10%, 15%, 20% and 25% for each ₹4 lakh block, and 30% above ₹24,00,000. On income of exactly ₹12,00,000 that comes to ₹20,000 plus ₹40,000, which is ₹60,000. The rebate has been sized to match that figure, which is why ₹12 lakh of slab-rate income ends at nil tax.
The rebate is deducted from tax before health and education cess is added. The Department's FAQs on computation of tax place it after the tax on total income and before surcharge and cess. If the rebate brings tax to nil, there is no cess either.
Salary of ₹12.75 lakh: where the standard deduction fits
The ₹12 lakh test is on total income, so a salaried person gets there after the standard deduction. Under Table Sl. No. 2 of section 19(1) of the 2025 Act, the standard deduction is ₹75,000 (or the salary, if lower) where tax is computed under section 202(1), and ₹50,000 in any other case. The same ₹75,000 applies under the new regime for FY 2025-26.
Illustration: Meera's only income for tax year 2026-27 is a salary of ₹12,75,000. After the ₹75,000 standard deduction her total income is ₹12,00,000. Slab tax is ₹60,000, the rebate is ₹60,000, and she pays nothing. If her employer also puts money into her NPS account, the employer contribution deduction (allowed in the new regime too, as the comparison of sections 80CCD(1B) and 80CCD(2) explains for FY 2025-26) pulls total income down further.
Most other deductions do not help in this regime. Section 202(2) computes total income without the bulk of the Chapter VIII deductions and several exemptions, so 80C investments, health insurance premium and the HRA exemption are not available to bring income under ₹12 lakh. People who need those deductions to fall under ₹5 lakh are in the old regime and the ₹12,500 rebate.
Marginal relief between ₹12 lakh and about ₹12.7 lakh
Without relief, earning ₹1 more than ₹12 lakh would cost ₹60,000 of tax. Clause (b) of section 156(2), and the matching clause in section 87A, prevent that. Where total income exceeds ₹12 lakh and the tax on it exceeds the amount by which income is above ₹12 lakh, the rebate equals the difference. The effect: you never pay more tax than the income you earned above ₹12 lakh.
The relief runs out where slab tax equals the excess. Tax at ₹12 lakh plus an excess of E is ₹60,000 + 15% of E, and that equals E when E is about ₹70,588. So relief applies up to a total income of roughly ₹12,70,588. Above that, full slab tax is payable.
| Total income | Slab tax | Rebate | Tax before cess | Tax with 4% cess |
|---|---|---|---|---|
| ₹11,75,000 | ₹57,500 | ₹57,500 | Nil | Nil |
| ₹12,00,000 | ₹60,000 | ₹60,000 | Nil | Nil |
| ₹12,10,000 | ₹61,500 | ₹51,500 | ₹10,000 | ₹10,400 |
| ₹12,25,000 | ₹63,750 | ₹38,750 | ₹25,000 | ₹26,000 |
| ₹12,50,000 | ₹67,500 | ₹17,500 | ₹50,000 | ₹52,000 |
| ₹12,75,000 | ₹71,250 | Nil | ₹71,250 | ₹74,100 |
| ₹13,00,000 | ₹75,000 | Nil | ₹75,000 | ₹78,000 |
The ₹12,10,000 row matches the illustration in the Department's own FAQ on the section 87A rebate for FY 2025-26, which shows ₹10,000 payable on that income. Note that the relief cuts the tax but not the cess on what remains: at ₹12,10,000 the employee pays ₹10,400, not ₹10,000.
A salaried person with income in this band gains a lot from a small deduction. At a salary of ₹13,00,000, total income is ₹12,25,000 and tax is ₹26,000. An employer NPS contribution of ₹25,000 would bring total income to ₹12,00,000 and the tax to nil.
Capital gains taxed at special rates are outside the rebate
This is the part that produces demand notices and unexpected self-assessment tax. The Department's Budget 2025-26 brief says that for resident individuals in the new regime, incomes chargeable at special rates "shall be excluded from calculating the Section 87A rebate", giving capital gains under sections 111A and 112 as examples. In the statute this is done by the cap in section 156(3), and in the proviso to section 87A for AY 2026-27: the rebate cannot exceed tax at the slab rates.
Take short-term gains on listed equity shares and equity fund units sold on a stock exchange with securities transaction tax. They are taxed at 20% under section 196 of the 2025 Act, and under section 111A of the 1961 Act for transfers from 23 July 2024. Long-term gains on the same assets under section 112A of the 1961 Act, and the matching provision of the 2025 Act, are also taxed at a flat rate. None of that tax is slab-rate tax.
Illustration: total income ₹11 lakh, but tax is ₹62,400
Rohan has salary of ₹8,75,000 and a short-term gain of ₹3,00,000 on listed shares in tax year 2026-27.
- Salary after the ₹75,000 standard deduction: ₹8,00,000. Add the gain: total income ₹11,00,000, which is within ₹12 lakh.
- Slab tax on ₹8,00,000: 5% of ₹4,00,000, that is ₹20,000.
- Tax on the gain under section 196: 20% of ₹3,00,000, that is ₹60,000. Total tax: ₹80,000.
- Rebate under section 156(2)(a): lower of 100% of tax or ₹60,000, so ₹60,000. Section 156(3) limits it to the slab-rate tax of ₹20,000.
- Tax payable: ₹60,000, plus 4% cess of ₹2,400, giving ₹62,400.
If the same ₹11,00,000 had all been salary-type income taxed at slab rates, the tax would have been ₹50,000 and the rebate would have cancelled it entirely. The gain also counts towards the ₹12 lakh limit: had Rohan's gain been ₹4,50,000, total income would be ₹12,50,000 and he would be in the marginal relief band or beyond it.
Where the basic exemption still helps
The gain can still use any unused basic exemption. Section 196(2) lets a resident individual whose other income is below the amount not chargeable to tax (₹4,00,000 in the new regime) reduce the gain by the shortfall. Take a retired person with ₹2,00,000 of interest and a short-term equity gain of ₹5,00,000. The ₹2,00,000 shortfall comes off the gain, leaving ₹3,00,000 taxed at 20%, which is ₹60,000. Slab tax is nil, so the rebate is nil too, and ₹62,400 is payable with cess. The Department's page on new and old regime rates for salaried individuals for AY 2026-27 lists the slab rates this adjustment runs against.
Losses matter here as well. A short-term capital loss set off against the gain reduces the special-rate tax that the rebate cannot touch; the rules for setting off and carrying forward capital losses decide which losses can be used against which gains.
Checks before you rely on nil tax
- Regime. The ₹60,000 rebate exists only for income taxed under section 202(1), or section 115BAC(1A) for FY 2025-26. A business or professional taxpayer who has opted out through Form 10-IEA gets only the ₹12,500 rebate, and only up to ₹5 lakh.
- Residence. Count your days in India for the year. A non-resident gets no rebate at all, however small the income.
- Total income, not salary. Add interest, rent, freelance income, dividends and every capital gain, including gains on mutual fund switches, before comparing with ₹12 lakh.
- Special-rate income. Split the tax into slab-rate tax and flat-rate tax. Only the first can be rebated.
- The band above ₹12 lakh. Between ₹12,00,001 and about ₹12,70,588, work out the excess over ₹12 lakh; that excess, plus cess, is roughly your tax.
- Advance tax. If a large capital gain arises mid-year, the flat-rate tax on it is not covered by the rebate and can create an advance tax liability for the instalments after the sale.
When filing, the return utility computes the rebate itself, and validation rule 484 for AY 2026-27 says that a person with total income above ₹12,00,000 cannot claim the rebate, subject to marginal relief. If the computed tax in your draft return is higher than you expected, look first at Schedule CG and Schedule SI, where special-rate income is reported, because that is usually the reason the rebate has not reduced tax to nil.
