ITR Filing Guide: How to Claim Zero Tax Liability Under Section 87A
Understanding the nuances of the new and old tax regimes is crucial for taxpayers aiming to minimize their tax burden. While many confuse the basic exemption limit with tax-free income, the real secret to paying zero tax lies in the Section 87A rebate.
Understanding the Section 87A Rebate
The Section 87A rebate is a mechanism designed to provide tax relief to resident individuals whose total taxable income falls below specific thresholds. It is important to note that the rebate is applied after the tax is calculated according to the applicable slabs but before the addition of the health and education cess.
Essentially, the rebate reduces your calculated tax liability to zero, provided your income remains within the prescribed limits. This is distinct from the basic exemption limit; for instance, under the new regime, the basic exemption is ₹4 lakh, but the rebate allows for much higher income levels to remain tax-free.
Zero Tax Limits: New vs. Old Regime
The eligibility for a "zero tax" status differs significantly depending on which regime you choose for the Financial Year 2025-26:
- New Tax Regime: This regime offers much broader relief. Individuals with a total income of up to ₹12 lakh can claim a rebate of up to ₹60,000. This effectively means that if your taxable income is ₹12 lakh or less, your tax liability becomes nil.
- Old Tax Regime: The relief under the old regime is more conservative. A rebate of up to ₹12,500 is available, but it is only applicable to individuals whose total taxable income does not exceed ₹5 lakh.
Marginal Relief: A Safety Net for Higher Earners
One of the most critical features of the new tax regime is "marginal relief." This is designed to protect taxpayers whose income slightly exceeds the ₹12 lakh threshold, ensuring they aren't unfairly penalized by a tax amount that is disproportionately high compared to their extra income.
If your total taxable income is below ₹12,70,588, the marginal relief rule ensures that the tax you pay is limited to the exact amount by which your income exceeds ₹12 lakh. For example, if your taxable income is ₹12,02,000, rather than paying the full calculated tax, the relief mechanism would limit your tax to just ₹2,000. However, once income exceeds ₹12,70,588, this marginal relief is no longer available.
Important Restrictions and Changes
Taxpayers must be cautious, as the Section 87A rebate is not universal across all types of income. Under the new regime, the rebate cannot be claimed against income taxed at special rates, such as capital gains or lottery winnings. Under the old regime, while more flexible, the rebate cannot be applied against long-term capital gains (LTCG) from equity shares or equity-oriented funds under Section 112A.
Looking ahead, taxpayers should note that Section 87A of the Income Tax Act, 1961, will be replaced by Section 156 of the Income Tax Act, 2025, effective from April 1, 2026.
Key Takeaways
- New Regime Advantage: You can achieve zero tax liability under the new regime for total income up to ₹12 lakh via a ₹60,000 rebate.
- Old Regime Limit: The old regime only provides zero tax benefits for those with a total taxable income up to ₹5 lakh.
- Marginal Relief Benefit: Under the new regime, marginal relief protects taxpayers with income up to ₹12,70,588 from paying excessive tax when they slightly cross the ₹12 lakh mark.