Tax Rebate & Marginal Relief u/s 87A: Smart Tax Planning

Do you know that you can pay less tax and keep your hard-earned money to yourself? Sounds great, right? It is possible, but only if you know how to grip Tax Rebate and Marginal Relief under Section 87A.These tax tools could be your key to slashing your tax bill, if you know how!

But here is the big question: how do they work and how do you save tax with them?

Simply put, a Tax Rebate directly reduces your tax, while Marginal Relief ensures that small income changes do not cause a major jump in your tax liability. Let’s explore this blog for your smart tax planning.

What is an Income Tax Rebate u/s 87A?

An income tax rebate is a benefit given by the government of India, which reduces the amount of tax if your income is below a specific threshold limit. Simply put, if your taxable income is under the set threshold, you get a discount on the tax you must pay.

• You must file your income tax return on time to claim this rebate.
• In India, tax refunds are considered under Section 87A of the Income Tax Act, 1961.
• The rebate limit depends on whether you use the old or the new tax system.
• For FY 2025-2026, if your taxable income is more than Rs 12 lakh under the new tax regime, you could get a full refund on your payable tax.
• In the old tax regime, the rebate limit is Rs 5 lakh, offering a Rs 12,500 rebate.

What are the Eligibility Criteria for Tax Rebates u/s 87A?

Here are the eligibility criteria for tax rebates u/s 87A, which apply only to individuals whose taxable income is more than Rs 12 lakh.

• Only residentindividual taxpayers are eligible.
• Hindu Undivided Families (HUFs), non-resident Indians (NRIs) & businesses do not qualify for this rebate.
• Section 87A allows seniors 60 or older and up to 80 to claim rebates.
• Aged senior citizens above 80 years are not eligible to claim the refund.
• The rebate applies to the total tax before applying the 4% health and education cess.

Also Read: What Is AIS in Income Tax? A Simple Guide for Taxpayers

Income Tax Surcharge Rate for FY 2025-26

An income tax surcharge is an extra tax added to your regular income tax if you earn above a specific limit. It ensures that higher earners pay more taxes than those with lower incomes.

1. Highest Surcharge: For individuals in the top income brackets, the surcharge rate will be 25% instead of 37% under the new tax regime.
2. For AOPs (Associations of Persons): If an AOP has only companies as members and earns over Rs 1 crore, it pays a 15% surcharge.
3. Long-Term Capital Gains (LTCG): For gains on listed shares or securities, a 15% surcharge is applicable.
4. For Firms, LLPs and Local Authorities: A 12% surcharge applies if the income exceeds Rs 1 crore.

This system ensures that higher-income earners contribute more to the tax system.

Let us discuss the Union budget for 2025 in the next headline.

Union Budget 2025 Updates on Marginal Relief

The Union Budget 2025, reflected by Finance Minister Nirmala Sitharaman, introduces updates on "Marginal Relief." Let us break it down and understand how this can benefit taxpayers:

Under Section 87A of the Income Tax Act, Marginal relief protects taxpayers from paying higher taxes if their income is more than Rs. 12 lakhs by a small amount.

Without this relief, even a slight increase in income over Rs. 12 lakhs could result in a notably higher tax burden.

Marginal relief worked or applied if your income exceeds Rs. 12 lakhs by a small margin, like Rs. 10,000, the extra tax you pay is only Rs. 10,000, not the full tax based on the higher income.

Point to Remember: Marginal relief is available only if your income is below Rs. 12.75 lakh. Beyond this, regular tax calculations apply.

Now, this brings a doubt as to who can claim marginal relief. Let us know.

Who Can Claim Marginal Relief in Income Tax?

Marginal relief claims are available to the following:

1. Local Individuals
   

   It applies to both salaried & non-salaried local taxpayers.

2. Income Range
   

   Marginal relief is for those with taxable incomes between the range of Rs. 12,00,000 and Rs. 12,75,000.

3. Disqualified Groups
   

   Non-residents, Hindu Undivided Families (HUFs) and other specific groups are not eligible for marginal relief.

Must Read: What is Tax Planning: Objectives, Types & Importance.

How Marginal Relief Benefits Taxpayers in 2025-26?

Here are the ways it benefits taxpayers in 2025-26:

1. Avoid Unfair Tax Increases
   

   Tax rates can change quickly when your income rises from Rs. 12 lakh. Marginal relief ensures you do not pay more tax than the extra income you earn, making the system fairer for you.

2. Encourages Additional Earnings
   

   Many individuals avoid bonuses or raises due to fear of higher taxes. You can accept extra earnings with marginal relief, knowing your tax will not increase sharply.

3. Supports Middle-Class Families
   

   For middle-income households, marginal relief helps by reducing the tax burden when income raises than Rs. 12 lakhs, It helps you leaving more money in your hands.

Keep in Mind: If your income falls between Rs. 12 lakh & Rs. 12.75 lakh, check if you qualify for marginal relief, it can lower your tax payment.

Calculating Your Income Tax Rebate: A Step-by-Step Guide

Let's determine which tax bracket your income falls under. You are required to calculate your taxable income by adding all income sources & subtracting any eligible deductions.

Now, simplify the calculation by a practical scenario. Imagine that Mr Sharma, with an annual income of Rs. 6,50,000, has deductions reduced under various sections of the Income Tax Act for the new tax regime.

Income & Deductions
Total Income	Rs. 6,50,000
Standard Deduction (applicable under new regime for salaried individuals)	Rs. 75,000
Net Taxable Income	Rs. 6,50,000 – Rs. 75,000 = Rs. 5,75,000
Slab-wise Tax Calculation (New Regime FY 2025-26)
Rs. 0 – Rs. 4,00,000	NIL
Rs. 4,00,001 – Rs. 5,75,000 (Taxable portion = Rs. 1,75,000)	Taxed at 5%
Tax on Rs. 1,75,000 @ 5%	Rs. 1,75,000 × 5% = Rs. 8,750
Rebate & Final Tax Liability
Section 87A Rebate (Net taxable income < Rs. 7,00,000)	Rebate = Rs. 8,750
Final Tax Liability	Rs. 8,750 – Rs. 8,750 = Rs. 0

Under the new regime (FY 2025-26), the total tax liability is Rs. 0 due to the Section 87A rebate, just like in the old regime example.

Tax Deductions That Help You Claim a Tax Rebate Under Section 87A

Here is a summary of tax deductions that can help you claim a rebate under Section 87A in FY 2025–26, presented in a table:

*During the earlier rule, the rebate limit was Rs. 5,00,000 incomes with a Rs. 12,500 rebate.

Common Mistakes to Avoid When Calculating Total Taxable Income

Evaluating your total taxable income is vital for accurate tax filing. Here are key mistakes to avoid:

1. Not Including All Sources of Income: Ensure you check all the accounts for all income sources, even smaller ones.
2. Wrongly Claiming Deductions: Under the new tax regime, most deductions are not given; claim the ones that fall under your income bracket, like NPS contributions by the employer and standard deductions.

3. Not Considering Standard Deduction: Remember, under the new tax regime, you get a Rs. 50,000 standard deductions on salary. Do not miss applying it.

4. Neglecting Exempt Income: Understand which income is tax-free & which is taxable to avoid confusion.

5. Ignoring Form 26AS or AIS: Match your declared income with Form 26AS or Annual Information Statement (AIS) to prevent discrepancies or notices from the tax department.

6. Relying Only on Salary Slip: Look at your financial framework, not just salary details, especially under the new tax regime.

Pro Tip: Use a tax calculator to avoid missing tax benefits.

What are the FY 2025-26 Tax Slab Rates per the Union Budget?

For FY 2025-2026, the rebate increases from Rs. 60,000 to Rs. 25,000. Those earning up to Rs. 12 lakhs pay no tax, while those earning up to Rs. 12.75 lakhs are taxed after a Rs. 75,000 standard deductions. These new tax slabs apply from April 1, 2025.

The table below shows the new income tax slab rates under the new regime for the FY 2025-26:

Income	Tax Rate
Up to Rs. 4,00,000	NIL
Rs. 4,00,001 – Rs. 8,00,000	5%
Rs. 8,00,001 – Rs. 12,00,000	10%
Rs. 12,00,001 – Rs. 16,00,000	15%
Rs. 16,00,001 – Rs. 20,00,000	20%
Rs. 20,00,001 – Rs. 24,00,000	25%
Above Rs. 24,00,000	30%

 *Marginal Relief: Still applicable with the rebate.

*Special Income: The rebate does not apply to income taxed at special rates, like capital gains under Section 112A.

Pro Tip: Use the income Tax Calculator to check your tax liability.

Tax Exemptions vs. Deductions vs. Rebates: What is the Difference?

These three have different and important purposes in income tax. Here is a simple breakdown with examples:

1. Tax Exemptions

• These are income types that are tax-free and are not considered in your taxable income.
• An Intense: House Rent Allowance (HRA), AgriculturalIncome
• Gifts from Close Relatives and Leave Travel Allowance (LTA)
• In short, this is income in your account, but you do not have to pay taxes.

2. Tax Deductions

• Tax deductions cut down or less your taxable income if you have spent or invested money in particular allowed categories.
• Examples: Section 80C Rs. 1.5 lakh for LIC, PPF, EPF, ELSS
• Section 80D: Rs. 25,000 for health insurance
• Home Loan Interest under Section 24
• You earn this income, but deductions reduce as you spend or invest smartly the taxable amount.

3. Tax Rebates

• A tax rebate directly reduces your tax after calculating your taxable income.
• Examples Section 87A: If your taxable income is next to Rs. 7,00,000, you get up to Rs. 25,000 off your final tax bill under the new tax regime.
• The rebate gives you a direct discount on your tax under the new regime.

Point to Noted: Extension of ITR Filing Deadline: The ITR deadline for FY 2024-2025 (AY 2025-26) is now September 15, 2025

Types of Tax Rebates in India

Here are the main types of tax rebates available to individual taxpayers:

1. Rebate Under Section 87A (Most Common)
   

   This is the most widely used tax rebate for Resident individuals having a taxable income range up to Rs. 7,00,000 (under the new regime for FY 2024-25). The rebate of up to Rs. 25,000, reducing your final tax payable to zero.

2. Rebate on Agricultural Income
   

   Agricultural income is tax-free sometimes, which can lower your overall tax liability by putting you in a lower tax bracket.

3. Rebate on Tax Paid via TDS or Advance Tax
   

   If tax is deducted at source or you have paid advance tax and your final tax liability after rebates is zero or negative, you can claim a refund. This acts as an indirect rebate for any overpaid tax.

4. Rebate on Relief Under Section 89
   

   If a delayed salary forced your income into a higher tax slab, Section 89 helps you calculate the correct tax and receive an exemption or rebate to adjust for the excess tax burden.

5. Rebate on Tax Relief Under Double Taxation Agreements
   

   If you have already paid taxes on income abroad, you will not be taxed again in India. Instead, you get a refund or tax credit for that amount under the Double Taxation Agreement.

Rebate Against Various Tax Liabilities

Understanding how Section 87A, the most well-known rebate in India, applies to various tax responsibilities. Here's how it works:

1. Rebate Under Section 87A: Main Rebate for Individuals

• This is the most common rebate for individuals with low to moderate incomes.
• Under this, the taxable income of up to Rs. 7,00,000 under the new tax regime and the rebate of up to Rs. 25,000, reducing your tax liability to zero.
• This is applied directly to your tax after calculating the tax using the applicable slab rates.

2. Rebate Does Not Apply to These Tax Liabilities

• There are specific income types where the Section 87A rebate does not apply, such as taxed under Section 112, except for long-term capital gains from listed equity shares and mutual funds, lottery Winnings or Gambling Income, dividend earnings (Taxed at special rates) and Tax deducted at source will not be valid for the rebate. However, you can claim a refund later.
• Even though your total income is under Rs. 7 lakh, the rebate may not valid if a major portion of your income is from these sources.

3. Rebate & Health and Education Cess

• In this rebate is applied prior the Health and Education Cess is added to your tax bill.
• If your tax bill is minimized to zero after the rebate, you do not need to pay any additional tax.

In short, the rebate does not apply to income taxed at special rates but can reduce or eliminate the tax liability on regular earnings.

Conclusion

To wrap up, tax rebates directly reduce the tax that individual pay and helping reducing your overall tax burden without affecting your income. In the Section 87A is majorly impactful for middle- and lower-income taxpayer, especially under the new tax regime, where incomes up to Rs. 7,00,000 are tax-free due to rebate benefits.

By correctly planning and filing your taxes, you can avoid overpaying and take full advantage of available government benefits.

Keep eye on the Union Budget, know the differences between exemptions, deductions and rebates and plan your taxes wisely to avoid common mistakes, make filing easier and more rewarding.

Frequently Asked Questions

1. Who is not eligible for 87A rebates?

   The 87A rebate is not available to individuals whose taxable income exceeds Rs . 12 lakhs. It is also unavailable for non-resident Indians (NRIs) & Hindu Undivided Families (HUFs).

2. How do you calculate marginal relief?

   To calculate marginal relief, first determine the excess tax payable due to the increase in income. Then, subtract the excess revenue from the excess tax. The difference reduces the total tax payable, ensuring a fair tax increase.

3. Can an NRI claim a rebate u/s 87A?

   No, the benefit of rebate u/s 87A is not available to Non-Resident Indians (NRI).

4. What is the difference between the new and old tax regimes?

   The initial exemption stage in the old tax regime was Rs. 3,00,000 for senior citizens and Rs . 5,00,000 for super senior citizens. Under the new tax system, up to Rs 7 lakhs of all income is excluded from income tax.