Section 87A rebate in Budget: When relief for small taxpayers was raised to ₹5000. How is it now?

Income tax rules have changed very rapidly in the last decade, so much so that a taxpayer can easily lose track of what was allowed earlier and what is applicable now.

One such change is about the rebate for small taxpayers under Section 87A of the Income Tax Act, 1961. It has been a subject of much discussion in the last 2-3 years, especially since Budget 2025, when the Government increased the amount of the rebate to ₹60,000 under new regime. While we will look at this in detail later in the article, in the lead-up to the Union Budget 2026, let us take you back to the time when the Section 87A rebate was a meagre ₹5000, that, too, after the government decided to increase it by ₹3000.

It was in Union Budget 2016-17 when the then Finance Minister, Arun Jaitley, proposed to increase the Section 87A rebate from ₹2000 to ₹5000.

Announcing the proposal in his speech, Jaitley said, "In order to lessen tax burden on individuals with income not exceeding ₹5 lakhs, I propose to raise the ceiling of tax rebate under section 87A from ₹2,000 to ₹5,000. There are 2 crore taxpayers in this category who will get a relief of ₹3,000 in their tax liability." This rebate hike was announced much before the new tax regime came into existence.

What's the rule now

In Budget 2025, Finance Minister Nirmala Sitharaman increased the Section 87A rebate to ₹60,000 on normal income up to ₹12 lakh for those under the new tax regime. The rebate has effectively made income up to ₹12 lakh tax-free. However, this rebate is not available on special interest incomes such as capital gains from equity shares and mutual funds.

Announcing the decision in Budget 2025, Sitharaman had said: "To tax payers up to ₹12 lakh of normal income (other than special rate income such as capital gains), tax rebate is being provided in addition to the benefit due to slab rate reduction in such a manner that there is no tax payable by them."

"The total tax benefit of slab rate changes and rebate at different income levels can be illustrated with examples. A taxpayer in the new regime with an income of ₹12 lakh will get a benefit of ₹80,000 in tax (which is 100% of the tax payable as per existing rates). A person having income of ₹18 lakh will get a benefit of ₹70,000 in tax (30% of tax payable as per existing rates)," she added.

The annexure to Budget Speech 2025 said, "Resident individual with total income up to ₹7,00,000 do not pay any tax due to rebate under the new tax regime. It is proposed to increase the rebate for the resident individual under the new regime so that they do not pay tax if their total income is up to ₹12,00,000. Marginal relief as provided earlier under the new tax regime is also applicable for income marginally higher than ₹12,00,000."

The Section 87A rebate under the Old Tax Regime is ₹12,500 on income up to ₹5 lakh.