Income tax rebate rules for FY 2025-26 (AY 2026-27) explained: How your tax can become zero and changes experts want in Budget 2026

With Budget 2026 just around the corner, many taxpayers have been focusing on whether the Finance Ministry will increase the income tax rebate on February 1, 2026? Taxpayers following both the old and new tax regimes get a tax rebate under Section 87A of the Income Tax Act, 1961. While the rebate is different under both tax regimes, many taxpayers expect the government to increase its limit.

In this write-up, ET Wealth Online will explain what is the income tax rebate limit under the old and new tax regimes? Who is eligible to get it and what are the expectations of experts related to the rebate from Budget 2026?

What is the tax rebate under Section 87A and what are its limits in the old and new tax regimes?

Sanjay Kumar, director, Nangia Global, explains the Income Tax Act, 1961, provides relief to residents through a rebate mechanism under Section 87A, which effectively reduces tax liability to nil up to a prescribed income threshold.

“Under the old tax regime, a rebate of up to Rs 12,500 is available for individuals with total income not exceeding Rs 5 lakh, while the new tax regime offers a higher rebate of up to Rs 60,000 for income up to Rs 12 lakh, thereby providing enhanced relief to middle-income taxpayers, says Kumar.

Tax rebate limit under old and new tax regimes

Tax regime	Taxable income limit for rebate	Maximum rebate available	Effective tax payable
New tax regime	Up to Rs 12 lakh	Up to Rs 60,000	Zero
Old tax regime	Up to Rs 5 lakh	Up to Rs 12,500	Zero

Abhishek Soni, founder and CEO, Tax2Win, says, “Section 87A rebate is a tax relief given to resident individuals to reduce their income tax. It is not a deduction from income — it is a direct reduction in the tax payable. If your tax amount is equal to or less than the rebate, your final tax becomes zero (before cess).”

Soni further says the tax rebate is limited to the actual tax payable and one cannot get a refund beyond their tax amount.

Who is eligible to get an income tax rebate under Section 87A?

Soni says nly resident individuals can get a tax rebate. It is not allowed for Non-resident Indians (NRIs), Hindu Undivided Families (HUFs), firms and companies.

Tax rebate is not on income taxed at special rates

Soni further says, the rebate mainly applies to income taxed at normal slab rates.
“Income taxed at special rates (like certain capital gains) may still attract tax even if your total income is within the rebate limit,” says Soni.

What are experts’ expectations related to income tax rebate from Budget 2026?

Kumar says from a policy standpoint, greater clarity and uniformity in the application of Section 87A would be welcome in Budget 2026, particularly to address situations where marginal income breaches result in a disproportionately higher tax outgo.

“Introducing a gradual tapering mechanism, instead of an abrupt withdrawal of the rebate, would make the provision more equitable and predictable,” says Nangia.

Soni says any taxpayers expect the government to increase the income limit for the rebate further or extend the rebate benefit to special rate incomes like capital gains.

“There is also an expectation that the rebate rules are simplified so that people just above the limit do not face a sudden jump in tax. In short, Section 87A is meant to ensure that small and middle-income earners pay little or no tax, and taxpayers hope this relief continues to expand in the coming budgets,” says Soni.