ITR Filing Guide: How to Claim Zero Tax Under Section 87A Rebate

As the assessment period approaches, many salaried taxpayers are looking for ways to optimize their tax liability. Understanding the nuances between the old and new tax regimes, specifically through the Section 87A rebate, can be the difference between paying significant tax or achieving a zero-tax liability.

Understanding the Section 87A Rebate

A common misconception among taxpayers is confusing the basic exemption limit with the "zero tax" threshold. While the basic exemption limit determines the income level at which you start paying tax, the Section 87A rebate is a mechanism that cancels out your tax liability entirely if your total income falls below certain prescribed limits.

Under the current framework, the tax is first calculated based on the applicable slabs, and then the rebate is subtracted from that amount. This ensures that middle-income earners are not burdened with tax if their income is within the relief threshold.

Zero Tax in the New vs. Old Tax Regime

The threshold for claiming zero tax differs significantly depending on which regime you choose for the Financial Year 2025-26.

The New Tax Regime: The new regime offers a much higher threshold for tax relief. Individuals with a total income of up to ₹12 lakh can claim a rebate of up to ₹60,000. For instance, if an individual’s total taxable income is ₹9 lakh, they would technically owe tax based on the slabs, but the Section 87A rebate will reduce that liability to zero.

The Old Tax Regime: The old regime is more restrictive. A rebate is only available to resident individuals whose total taxable income does not exceed ₹5 lakh. In this case, the maximum rebate available is ₹12,500, effectively bringing the tax liability to zero for those at the ₹5 lakh mark.

Marginal Relief: Protection 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 rebate threshold.

Without marginal relief, an individual earning just over ₹12 lakh might end up paying more in tax than the extra income they earned above the limit. Marginal relief ensures that the tax payable is capped at the exact amount by which the income exceeds ₹12 lakh. However, it is important to note that this relief is only applicable if the total taxable income is less than ₹12,70,588.

Important Limitations and Future 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 applied to income taxed at special rates, such as capital gains or lottery winnings. Similarly, under the old regime, the rebate cannot be claimed against long-term capital gains (LTCG) arising 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