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

Sec 87A: Rebate of income-tax in case of certain individuals.

An assessee, being an individual resident in India, whose total income does not exceed five hundred thousand rupees, shall be entitled to a deduction, from the amount of income-tax (as computed before allowing the deductions under this Chapter) on his total income with which he is chargeable for any assessment year, of an amount equal to hundred per cent of such income-tax or an amount of twelve thousand and five hundred rupees, whichever is less:

Provided that where the total income of the assessee is chargeable to tax under sub-section (1A) of section 115BAC, and the total income

(a) does not exceed seven hundred thousand rupees twelve hundred thousand rupees[1], the assessee shall be entitled to a deduction from the amount of income-tax (as computed before allowing for the deductions under this Chapter) on his total income with which he is chargeable for any assessment year, of an amount equal to one hundred per cent of such income-tax or an amount of twenty-five thousand rupees sixty thousand rupees, whichever is less;

(b) exceeds seven hundred thousand rupees twelve hundred thousand rupees and the income-tax payable on such total income exceeds the amount by which the total income is in excess of seven hundred thousand rupees, the assessee shall be entitled to a deduction from the amount of income-tax (as computed before allowing the deductions under this Chapter) on his total income, of an amount equal to the amount by which the income-tax payable on such total income is in excess of the amount by which the total income exceeds seven hundred thousand rupees twelve hundred thousand rupees.

Inserted by Finance Bill 2025 w.e.f 01/04/2026 i.e. PY 2025-26) 

Provided further that the deduction under the first proviso, shall not exceed the amount of income-tax payable as per the rates provided in sub-section (1A) of section 115BAC.”

Memorandum to Finance Bill 2025: Rebate under section 87A

Under the provisions of section 87A of the Act, an assessee, being an individual resident in India, having total income not exceeding Rs. 5 lakh, is provided a rebate of 100 per cent of the amount of income-tax payable i.e., an individual having income till Rs. 5 lakh is not required to pay any income- tax.

Finance Act, 2023 inserted proviso to the said section, to provide rebate of income-tax in cases where the total income of such assessee is chargeable to tax under sub-section (1A) of section 115BAC. Proviso to section 87A provides the rebate of income-tax in cases of such individuals, upto Rs.25,000/- where the total income does not exceed Rs. 7,00,000/- (clause (a) of the said proviso) and marginal relief where the total income exceeds Rs. 7,00,000/- (clause (b) of the said proviso) to income chargeable to tax under sub-section (1A) of section 115BAC.

The provisions of sub-section (1A) of section 115BAC are subject to the other provisions of Chapter XII i.e. determination of tax in certain special cases. Hence, proviso to section 87A clearly provides that tax on incomes chargeable at special rates (for e.g.: capital gains u/s 111A, 112 etc.) as specified under various provisions of Chapter XII, are not included while determining the rebate of income-tax under the first proviso to section 87A.

From assessment year 2026-27 onwards, for an assessee, being an individual resident in India whose income is chargeable to tax under the sub-section (1A) of section 115BAC, it is proposed to,–

(i)        enhance the limit of total income for rebate in clause (a) and (b) of first proviso under section 87A, on which the income-tax is payable as per the rates of income-tax under sub-section (1A) of section 115BAC, from Rs. 7,00,000/- to Rs. 12,00,000/- and the limit of rebate in clause (a) of first proviso to section 87A from Rs. 25,000/- to Rs. 60,000/-.

(ii)      rationalise the first proviso to section 87A by inserting a new proviso so as to provide that the deduction under the first proviso, shall not exceed the amount of income-tax payable as per the rates provided in sub-section (1A) of section 115BAC.

Further, as mentioned in para. 4 above, such rebate of income-tax is not available on tax on incomes chargeable at special rates (for e.g.: capital gains u/s 111A, 112 etc.).

[Clauses 2, 20, 24 & the First Schedule]

Controversy: Does the Rebate Apply to Special Rate Incomes?

Software Change by CPC – July 2024: The Income Tax Department modified its ITR processing utility to restrict the rebate under Section 87A against special incomes. Consequently, taxpayers who had claimed such rebates saw intimations under Section 143(1) with additional demand. The move caused confusion as many taxpayers had previously claimed the rebate legitimately based on total income being within the threshold.

The Mumbai bench of Commissioner of Income-tax (Appeals) has decided in the favour of Section 87A tax rebate on special rate incomes. The CIT (A) Mumbai held on February 27, 2025 that Section 87A tax rebate is available on special rate income like Short Term Capital Gains (STCG) u/s 111A and accordingly issued instructions to the assessing officer (AO) to allow it in the case under its consideration.

Does this change after the Amendment: In my opinion Section 87A rebate continues to be available under the old tax regime (i.e., the regime available upon opting under Section 115BAC(6)) even after the amendments introduced by the Finance Bill, 2025. The amendment proposed in the Finance Bill, 2025 specifically targets the new tax regime under Section 115BAC(1A), which is now the default regime from AY 2024–25. Under this new regime, the rebate under Section 87A has been enhanced to ₹60,000 and the eligible income threshold increased to ₹12,00,000; however, the rebate will not be available against income taxed at special rates, such as short-term capital gains under Section 111A, long-term capital gains under Sections 112 or 112A, or income like lottery winnings under Section 115BB. In contrast, the old tax regime remains unaffected by these changes—resident individuals with a total income not exceeding ₹5,00,000 continue to be eligible for a rebate of up to ₹12,500 under Section 87A, without any specific exclusion for special rate income.

Tax Regime	Rebate u/s 87A	Income Limit	Rebate Amount	Exclusion of Special Rate Income
Old Regime	Yes	₹5,00,000	₹12,500	No exclusion (rebate can apply even to special rate income as per current legal position)
New Regime (Sec 115BAC(1A))	Yes	₹12,00,000	₹60,000	Yes (rebate not allowed from tax on special rate incomes from AY 2026–27)

[1]      Note: Amended by Finance Bill 2025 w.e.f 01/04/2026 i.e. PY 2025-26.