Budget 2026 Shocker: Section 87A Rebate Limit Slashed—Are You Still Tax-Free?

Budget 2026: What is the Section 87A rebate limit under new I-T regime?

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The Budget 2026 Bombshell on Section 87A

If you’ve been banking on paying zero income tax under the new regime, Budget 2026 just threw a wrench in your plans. In a quiet but impactful change, Finance Minister Nirmala Sitharaman announced a sharp reduction in the Section 87A rebate limit—specifically for taxpayers opting for the new income tax regime.

This move affects millions of middle-income earners who switched to the simplified new regime expecting relief. Now, many may find themselves with an unexpected tax liability. So, what exactly changed, and how can you navigate this new reality? Let’s dive in.

What Is Section 87A Rebate, Anyway?

Section 87A of the Income Tax Act is a provision that allows eligible taxpayers to claim a full rebate on their income tax liability—if their total taxable income falls below a certain threshold. Essentially, it’s the legal mechanism that enables “zero tax” for low- and middle-income individuals.

Crucially, this rebate only applies if your total tax liability (before adding cess) is less than or equal to the rebate amount. It doesn’t reduce your income—it reduces your final tax bill to zero, provided you meet the criteria.

Section 87A Rebate Changes in Budget 2026

Here’s the key update from Budget 2026:

  • Under the NEW tax regime: The maximum rebate under Section 87A has been slashed from ₹75,000 to ₹60,000.
  • Under the OLD tax regime: The rebate remains unchanged at ₹12,500 (for income up to ₹5 lakh).

But wait—there’s more nuance. The ₹60,000 rebate under the new regime now corresponds to a maximum taxable income of ₹7 lakh (not ₹7.5 lakh as before). Why? Because the rebate is calculated on the tax payable, not directly on income.

Let’s break it down with an example:

  1. Your taxable income: ₹7,00,000
  2. Tax under new regime (5% slab): ₹25,000
  3. Add 4% health & education cess: ₹1,000
  4. Total tax before rebate: ₹26,000
  5. Section 87A rebate (max ₹60,000): Full ₹26,000 rebated
  6. Final tax payable: ₹0

However, if your income crosses ₹7,00,000—even by ₹1—you lose the full benefit. At ₹7,00,001, your tax jumps to over ₹26,000, and since the rebate caps at ₹60,000, you’ll still owe a small amount. This creates a “cliff effect” that could catch many off guard.

Who Still Qualifies for Zero Tax Under the New Regime?

You can still pay zero income tax in FY 2026–27 if ALL of the following are true:

  • You opt for the new income tax regime (default from April 1, 2026).
  • Your total taxable income is ₹7 lakh or less.
  • You have no other sources of income that push you into higher slabs (e.g., significant interest or capital gains).

For those with income between ₹7–7.5 lakh, the change is brutal. Previously, they paid zero tax. Now, they face a sudden tax bill of ₹26,000+. This group—often young professionals with metro salaries—may now reconsider switching back to the old regime if they have deductions like HRA, 80C, or home loan interest.

Old vs. New Regime After Budget 2026: Which Is Better?

The answer depends entirely on your financial profile:

Scenario New Regime (Post-Budget 2026) Old Regime
Income ≤ ₹7 lakh, no deductions ✅ Zero tax ❌ Likely higher tax
Income ₹7–9 lakh, with HRA + 80C ❌ Taxable ✅ May still be zero/low tax
Income > ₹10 lakh ✅ Lower rates, simpler filing ✅ Better if heavy deductions

Use the official Income Tax India portal calculator to compare both regimes before filing.

Practical Tips to Maximize Your Savings

Don’t let this change derail your finances. Here’s how to adapt:

  1. Re-evaluate your tax regime choice: If you’re near the ₹7 lakh mark and have deductions, the old regime might now save you money.
  2. Optimize your salary structure: Ask your employer to include more tax-exempt allowances (like food coupons or NPS contributions under 80CCD(2)).
  3. Invest strategically: Even under the new regime, employer NPS contributions (up to 14%) are tax-free—a hidden perk many overlook [INTERNAL_LINK:nps-tax-benefits].
  4. Track your income closely: A bonus or freelance gig could push you over ₹7 lakh. Plan withdrawals or defer income if possible.

Conclusion: Don’t Panic—Plan Smart

Yes, the Section 87A rebate cut in Budget 2026 narrows the path to zero tax—but it doesn’t close it. For disciplined earners with income up to ₹7 lakh, the new regime remains a powerful tool for simplicity and savings. For others, it’s a wake-up call to revisit their tax strategy.

Remember: tax planning isn’t about avoiding every rupee—it’s about making informed choices that align with your life goals. Use this change as an opportunity to get smarter about your money. And when in doubt, consult a certified tax advisor before filing your ITR.

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