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

As the financial year progresses, taxpayers must navigate the complexities of the new and old tax regimes to optimize their liabilities. Understanding how to leverage Section 87A can mean the difference between paying significant taxes and achieving a "zero tax" status.

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 defines the income level above which tax calculation begins, the Section 87A rebate is a mechanism that reduces your calculated tax liability to zero if your total income falls below specific thresholds.

Under the current framework, the rebate is applied after the tax is calculated based on applicable slabs but before the addition of cess. This provides substantial relief to resident individuals, effectively neutralizing their tax burden within certain income brackets.

Zero Tax Limits: New vs. Old Regime

The eligibility for a zero tax liability varies significantly depending on which regime you choose for the Assessment Year 2026-27 (FY 2025-26).

The New Tax Regime

The new regime offers much higher thresholds for tax relief. Individuals with a total income of up to ₹12 lakh can claim a rebate of up to ₹60,000. For example, if an individual's taxable income is ₹9 lakh, even though they have crossed the basic exemption limit, the Section 87A rebate will wipe out the calculated tax, resulting in zero liability.

The Old Tax Regime

The old regime is more restrictive. A rebate of up to ₹12,500 is available, but only for individuals whose total taxable income does not exceed ₹5 lakh. This regime relies heavily on deductions like Section 80C and standard deductions to bring the taxable income below this crucial ₹5 lakh mark.

Marginal Relief: Protection for Mid-Level Earners

A critical feature of the new tax regime is "Marginal Relief," designed to protect taxpayers whose income slightly exceeds the ₹12 lakh threshold. Without this relief, a small increase in income could lead to a disproportionately high tax jump.

Marginal relief ensures that if your income exceeds ₹12 lakh, the tax payable is capped at the exact amount by which your income exceeds that limit. However, this protection is finite; it is only available if the total taxable income remains below ₹12,70,588. Once income exceeds this upper limit, the standard tax slabs apply without the benefit of marginal relief.

Important Exceptions and Future Changes

It is vital to note that the Section 87A rebate is not a blanket benefit for 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. Similarly, in the old regime, the rebate cannot be applied against long-term capital gains under Section 112A.

Looking ahead, taxpayers should be aware of upcoming legislative changes. Section 87A of the Income Tax Act, 1961, is set to be replaced by Section 156 of the Income Tax Act, 2025, effective from April 1, 2026.

Key Takeaways