Union Budget 2026: How FM Nirmala Sitharaman tweaked Section 87A in 2025 and reshaped rebate mechanism
Union Budget 2025 introduced a major reset in personal income taxation by significantly expanding the rebate under Section 87A, reshaping how middle-income earners are taxed. As Budget 2026 approaches, the enhanced rebate has emerged as a key driver of the government’s push toward the new tax regime. The changes have altered tax calculations for millions of individual and salaried taxpayers, increasing effective tax-free income without revising slab rates.
- Jan 26, 2026,
- Updated Jan 26, 2026 6:44 PM IST
Union Budget 2025 marked a pivotal change in India’s personal income tax framework by substantially enhancing the rebate available under Section 87A of the Income Tax Act. As the country looks ahead to Budget 2026, this recalibration continues to shape tax planning decisions for individual and salaried taxpayers.
From the financial year 2025-26, resident individuals with a total income of up to Rs 12 lakh can avail a rebate that reduces their income tax liability to zero, provided the total tax payable before cess does not exceed Rs 60,000. The move represents a significant expansion of tax relief aimed squarely at middle-income earners.
No restriction till Rs 12 lakh
Earlier, the Section 87A rebate was restricted to individuals earning up to Rs 7 lakh under the new tax regime and up to Rs 5 lakh under the old regime. By raising the effective rebate threshold to Rs 12 lakh under the new regime, the government has widened the beneficiary base without altering tax slabs or the basic exemption limit. Instead, it has relied on the rebate mechanism to increase post-tax disposable income, reinforcing the new regime’s appeal through simplicity and higher take-home pay.
Importantly, the finance minister’s statement that no tax is payable on income up to Rs 12 lakh does not imply an increase in the basic exemption limit. The relief is delivered entirely through Section 87A, which allows a rebate from the total tax payable before the addition of the 4 per cent health and education cess. This distinction preserves the structure of the income tax system while offering targeted and measurable relief.
However, the benefit is not universal across all income types. Income taxed at special rates—such as short-term and long-term capital gains on equities, income from mutual funds, and winnings from lotteries or similar sources—remains outside the scope of the Section 87A rebate. Taxpayers with mixed income streams must therefore carefully assess which portions of their income qualify for the rebate and which will continue to attract tax.
These exclusions are consistent with earlier changes to income tax return utilities, which had disallowed the rebate in cases involving special-rate taxation. The continuation of this approach underscores the importance of understanding income composition and encourages more deliberate tax and investment planning. Taxpayers affected by these exclusions may still explore legitimate avenues such as exemptions under Sections 54 and 54EC to manage capital gains liabilities.
Eligibility for Section 87A
Eligibility under Section 87A is clearly defined. Only resident individuals qualify, and total income must not exceed Rs 12 lakh under the new tax regime or Rs 5 lakh under the old regime. The rebate allowed is capped at the lower of the prescribed limit or the total tax payable before cess, ensuring that it only offsets actual tax liability.
For FY 2025-26, the enhanced rebate under the new regime marks a decisive shift in the government’s approach to personal taxation. While the old regime continues to serve taxpayers who rely heavily on deductions and exemptions, the revamped Section 87A firmly positions the new regime as the preferred choice for a large segment of middle-income earners, balancing simplicity with substantial tax relief.
Union Budget 2025 marked a pivotal change in India’s personal income tax framework by substantially enhancing the rebate available under Section 87A of the Income Tax Act. As the country looks ahead to Budget 2026, this recalibration continues to shape tax planning decisions for individual and salaried taxpayers.
From the financial year 2025-26, resident individuals with a total income of up to Rs 12 lakh can avail a rebate that reduces their income tax liability to zero, provided the total tax payable before cess does not exceed Rs 60,000. The move represents a significant expansion of tax relief aimed squarely at middle-income earners.
No restriction till Rs 12 lakh
Earlier, the Section 87A rebate was restricted to individuals earning up to Rs 7 lakh under the new tax regime and up to Rs 5 lakh under the old regime. By raising the effective rebate threshold to Rs 12 lakh under the new regime, the government has widened the beneficiary base without altering tax slabs or the basic exemption limit. Instead, it has relied on the rebate mechanism to increase post-tax disposable income, reinforcing the new regime’s appeal through simplicity and higher take-home pay.
Importantly, the finance minister’s statement that no tax is payable on income up to Rs 12 lakh does not imply an increase in the basic exemption limit. The relief is delivered entirely through Section 87A, which allows a rebate from the total tax payable before the addition of the 4 per cent health and education cess. This distinction preserves the structure of the income tax system while offering targeted and measurable relief.
However, the benefit is not universal across all income types. Income taxed at special rates—such as short-term and long-term capital gains on equities, income from mutual funds, and winnings from lotteries or similar sources—remains outside the scope of the Section 87A rebate. Taxpayers with mixed income streams must therefore carefully assess which portions of their income qualify for the rebate and which will continue to attract tax.
These exclusions are consistent with earlier changes to income tax return utilities, which had disallowed the rebate in cases involving special-rate taxation. The continuation of this approach underscores the importance of understanding income composition and encourages more deliberate tax and investment planning. Taxpayers affected by these exclusions may still explore legitimate avenues such as exemptions under Sections 54 and 54EC to manage capital gains liabilities.
Eligibility for Section 87A
Eligibility under Section 87A is clearly defined. Only resident individuals qualify, and total income must not exceed Rs 12 lakh under the new tax regime or Rs 5 lakh under the old regime. The rebate allowed is capped at the lower of the prescribed limit or the total tax payable before cess, ensuring that it only offsets actual tax liability.
For FY 2025-26, the enhanced rebate under the new regime marks a decisive shift in the government’s approach to personal taxation. While the old regime continues to serve taxpayers who rely heavily on deductions and exemptions, the revamped Section 87A firmly positions the new regime as the preferred choice for a large segment of middle-income earners, balancing simplicity with substantial tax relief.