Ahead of the Union Budget 2026-27, income tax relief for the middle class is once again in sharp focus. One provision that has gained prominence in recent years is Section 87A rebate, especially under the new tax regime.
Section 87A is a rebate available to resident individual taxpayers. Unlike deductions that reduce taxable income, this rebate directly reduces the tax payable, and in some cases, brings the tax liability down to zero. Over the years, it has become a crucial tool for offering relief to lower- and middle-income earners.
How much rebate do taxpayers actually get under Section 87A?
The benefit under Section 87A differs sharply between the two tax regimes. Under the new tax regime, a rebate of Rs 60,000 is allowed for taxpayers with taxable income of up to Rs 12 lakh. It was earlier allowed on annual income up to Rs 7 lakh. This expanded rebate was one of the biggest attractions of the last year’s Budget tax overhaul.
In contrast, under the old tax regime, the Section 87A rebate is capped at Rs 12,500 and is available only for taxpayers with income of up to Rs 5 lakh. Beyond this threshold, no rebate is available, making the old regime less attractive for taxpayers who do not have substantial deductions to offset their income.
How Section 87A works under old vs new tax regime
Under the old tax regime, Section 87A continues to be available, but its impact remains limited as tax slabs and exemptions have largely remained unchanged. Taxpayers under this regime rely more on deductions such as Section 80C, 80D, HRA, and home loan interest to reduce taxable income.
The real change has happened under the new tax regime, which was introduced with the aim of simplifying taxation by offering lower slab rates in exchange for fewer exemptions. Since becoming the default regime from FY 2023-24, the government has steadily made it more attractive.
The hike in Section 87A rebate is a key part of this shift. Today, the rebate under the new regime can reduce tax to zero for taxable income of around Rs 12 lakh, making it a major incentive for salaried individuals who do not claim large deductions.
Can Budget 2026 push the rebate limit to Rs 15 lakh?
With inflationary pressures and rising household costs, expectations are growing that Budget 2026 could further enhance the Section 87A rebate, possibly extending tax-free income up to Rs 15 lakh under the new tax regime.
However, tax experts caution that further expansion may be difficult given fiscal constraints. As Richa Sawhney, Partner -Tax, Grant Thornton Bharat, points out:
“Section 87A rebate was introduced to support lower income resident taxpayers and is currently available under both the old and new tax regimes. As against reduction in income, this rebate reduces the income tax payable by the eligible taxpayer. Major overhaul of new tax regime was carried out last year, it was anticipated by the government that this change along with other reforms would result in revenue loss of nearly Rs 1 lakh crore in direct taxes.”
So further tweaking in section 87A rebate may not be feasible this year. In any case as far as old tax regime is concerned, given the government’s focus on simplification of taxation regime, which is embodied in the new tax regime, any relief under old tax regime may not be envisaged, she added.
This suggests that while demands for higher relief are understandable, the government may prefer to maintain stability after already absorbing a substantial revenue impact.
New vs old tax regime: Which one makes sense for FY 2026-27?
The expanding scope of Section 87A under the new tax regime has reignited the debate over whether taxpayers should continue with the old regime or switch.
According to Avnish Arora, Executive Director, Direct Tax, Forvis Mazars in India, the new regime has become broadly attractive for a large segment of taxpayers:
“Since Budget 2023 (FY 2023-24), the new tax regime (Section 115BAC) has become the default for FY 2023-24 onwards and now offers lower slab rates, a higher basic exemption, a larger standard deduction (Rs 75,000), and an enhanced Section 87A rebate that can reduce tax to zero up to around Rs 12 lakhs of taxable income, making it broadly attractive for most salaried taxpayers with limited deductions.”
The old regime still allows popular deductions and exemptions such as Section 80C, 80D, HRA, home loan interest, etc., which can significantly reduce taxable income, but its higher rates and complexity often outweigh these benefits for many taxpayers, Arora noted.
“Consequently, taxpayers with minimal deductions or modest total deductions generally benefit more from the new regime, while those with substantial investments and eligible exemptions may still find the old regime advantageous after careful comparison of net tax liabilities. Ultimately, the optimal choice for FY 2026-27 depends on individual income, deduction potential, and financial goals, and should be confirmed by computing liability under both regimes before filing.”
What taxpayers should realistically expect from Budget 2026
While a jump in Section 87A rebate to Rs 15 lakh would be a major boost for middle-class taxpayers, expectations need to be tempered. The government has already delivered back-to-back reliefs through slab rationalisation, higher standard deduction, and expanded rebate under the new tax regime.
For now, the focus in Budget 2026 may remain on consolidating the new tax regime, rather than announcing another aggressive tax giveaway. Taxpayers, meanwhile, would do well to evaluate both regimes carefully based on their income structure rather than relying solely on expectations of further rebates.