Understanding the Impact of Section 87A: Recent Controversy and Amendment

Section 87A: Rebate of Income-Tax in Case of Certain Individuals

An individual resident in India whose total income does not exceed five hundred thousand rupees is entitled to a deduction from income-tax computed on total income. The deduction equals one hundred percent of such income-tax or twelve thousand five hundred rupees, whichever is less.

Where total income is chargeable under section 115BAC(1A), individuals with income not exceeding twelve hundred thousand rupees receive a deduction of one hundred percent of income-tax or sixty thousand rupees, whichever is less. For those exceeding this threshold, marginal relief applies when income-tax payable exceeds the amount by which total income surpasses twelve hundred thousand rupees.

These provisions were inserted by the Finance Bill 2025, effective from April 1, 2026 (Assessment Year 2025-26).

Memorandum to Finance Bill 2025: Rebate Under Section 87A

Previously, individuals with income up to five lakhs rupees paid no income-tax under section 87A. The Finance Act 2023 introduced provisions for those taxed under section 115BAC(1A), offering rebate up to twenty-five thousand rupees for income not exceeding seven lakh rupees, with marginal relief for higher incomes.

From assessment year 2026-27 onwards, the Finance Bill 2025 proposes to enhance the income threshold from seven lakh to twelve lakh rupees and increase the maximum rebate from twenty-five thousand to sixty thousand rupees for qualifying individuals.

Importantly, the rebate does not apply to income taxed at special rates, such as capital gains under sections 111A, 112, or 112A, or lottery winnings under section 115BB.

Controversy: Does the Rebate Apply to Special Rate Incomes?

In July 2024, the Income Tax Department modified its processing utility to restrict section 87A rebate against special rate incomes. Taxpayers who had previously claimed such rebates received intimations under section 143(1) with additional demands.

The Mumbai bench of Commissioner of Income-tax (Appeals) ruled on February 27, 2025 that section 87A rebate applies to special rate income like Short Term Capital Gains under section 111A, instructing assessing officers to allow such rebate.

Does This Change After Amendment?

Section 87A rebate continues under the old tax regime, even after Finance Bill 2025 amendments. The amendments specifically target the new tax regime under section 115BAC(1A), which became default from Assessment Year 2024-25.

Under the new regime, the enhanced rebate of sixty thousand rupees and twelve lakh income threshold apply, but the rebate is unavailable against income taxed at special rates from Assessment Year 2026-27. The old tax regime remains unaffected—resident individuals with income not exceeding five lakh rupees receive up to twelve thousand five hundred rupees rebate without exclusion for special rate income.

Tax Regime Comparison

Old Regime: Rebate available up to twelve thousand five hundred rupees for income not exceeding five lakh rupees, with no exclusion for special rate income.

New Regime (Section 115BAC(1A)): Rebate available up to sixty thousand rupees for income not exceeding twelve lakh rupees, with exclusion of special rate income from Assessment Year 2026-27 onwards.