No tax for up to Rs 12.75 lakh income for salaried under new tax regime as Section 87A tax rebate hiked in Budget 2025

The finance minister has announced a hike in tax rebate under Section 87A. Due to this hike, resident individuals having net taxable income up to Rs 12 lakh will pay zero tax. Salaried individuals having standard deduction benefit of Rs 75,000 under the new tax regime will pay zero tax if gross taxable income does not exceed Rs 12.75 lakh. Current income tax laws allow zero tax on income up to Rs 7 lakh in the new tax regime.

However, if the net taxable income exceeds Rs 12 lakh, then the income will be taxed as per the new or old tax regime depending on the tax regime chosen by him/her.

Also read: New income tax slabs in Budget 2025: 30% tax now starts at Rs 24 lakh, 25% tax rate introduced for incomes between Rs 20-Rs 24 lakh


The Finance Minister said in Budget 2025 speech: "I am now happy to announce that there will be no Income Tax Payable up to income of 12 lakh rupees. I propose to revise tax rate structures as follows, zero to four lakh rupees nil, 4.8 lakh rupees to five four to eight lakh rupees, 5% eight to 12 lakh rupees, 10% 12 to 16 lakh rupees, 15% 16 to 20 lakh rupees, 20% 20 to 24 lakh rupees, 25% and above 24 lakh rupees, 30 lakh, 30% to taxpayers, to taxpayers up to 12 lakh of normal income, other than special grade incomes, such as capital gains."

The Explanatory Memorandum to Budget 2025 stated:
"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.).

The income tax rebate is only available for resident individuals. HUFs, NRIs, companies, and super senior citizens cannot claim rebate under section 87A.

Income tax rules on Section 87A tax rebate for FY 2025-26

Criteria	Old Regime	New Regime
Eligibility	Resident Individuals with income ≤ Rs 5,00,000	Resident Individuals with income ≤ Rs 12,00,000
Maximum Rebate Amount	Rs 12,500	Rs 60,000
Taxable Income After Rebate	Becomes Zero if tax ≤ Rs 12,500	Becomes Zero if tax ≤ Rs 60,000
Conditions	Income after deductions (e.g., 80C, 80D)	Deductions not allowed under the New Regime

Bombay High Court final judgement regarding Section 87A tax rebate

The Bombay High Court has made it clear that taxpayers should be allowed to claim Section 87A tax rebate on special rate income. However, the decision to allow this rebate claim or not in such special rate income is subject to interpretation of the law and adjudicating process.

“In our view, if the above exercise is required to be undertaken before coming to a definite conclusion as to whether the rebate under Section 87A is to be granted or denied on the tax computed under the provisions of Chapter XII other than Section 115BAC, then this is something which has to be deduced by interpretative and adjudicating process…. In our view, a combined reading of Section 87 and Section 87A would mean an assessee has to make a claim, the entitlement of which is to be examined by processing the return under Section 143(1)/143(3) etc..” said the Bombay High Court.

Bombay High Court in its judgement dated January 24, 2025, said: “We may, however, clarify that if any such claim is made, the revenue would certainly be free to examine the same as per the provisions of the Act. Both the revenue and the assessee have remedies under the Act for testing the validity of such a claim.”

Faranaaz Karbhari, Counsel at HSA Advocates said: “As a result of this decision, assessees will be permitted to claim a rebate under Section 87A of the Income-tax Act, 1961 for AY 2024-25 when filing online returns against tax computed under various sections of Chapter XII of the Act. However, the Bombay High Court did not decide on the validity of such claims. Consequently, any claims raised may be subject to examination under Section 143(1) of the Act and/or assessment by the Assessing Officer.”