As Budget 2026 draws closer, the spotlight is back on personal income tax—and for good reason. Finance Minister Nirmala Sitharaman is set to present the Union Budget on Sunday, February 1, marking her ninth straight Budget speech and the first Union Budget in more than a decade to be delivered on a Sunday.
With the Economic Survey 2026 expected shortly before, taxpayers are revisiting one of the most talked-about changes from last year: the expanded tax rebate under Section 87A, which significantly altered how much tax middle-income earners actually pay.
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What changed with Section 87A
The Union Budget 2025 introduced a notable tweak to Section 87A, aimed squarely at salaried individuals and small taxpayers opting for the new tax regime. From the financial year 2025-26 onwards, resident individuals earning up to Rs 12 lakh can bring their income tax liability down to zero—provided the tax payable before cess does not exceed Rs 60,000.
What made this move stand out was its design. The government did not touch tax slabs or raise the basic exemption limit. Instead, it used the rebate route to deliver relief, keeping the structure intact while widening the safety net for middle-income households.
A sharp jump from earlier limits
Before this change, the rebate under Section 87A was available only up to Rs 7 lakh under the new tax regime and Rs 5 lakh under the old regime. By effectively lifting the threshold to Rs 12 lakh under the new regime, the government expanded the beneficiary base without rewriting the tax code.
The strategy was simple: improve take-home pay, make tax filing easier, and increase the appeal of the new regime through clarity and predictability rather than complex deductions.
No change in exemption, only a rebate
A key point often misunderstood is the government’s claim that “no tax is payable up to Rs 12 lakh.” This does not mean the basic exemption limit has been raised. The relief comes entirely through Section 87A, which allows a rebate on the tax calculated before adding the 4 per cent health and education cess.
In effect, the framework remains unchanged, but the outcome feels lighter on the pocket—a calibrated move that preserves fiscal structure while offering targeted relief.
Not all income qualifies
The rebate, however, has clear boundaries. Income taxed at special rates remains outside its scope. This includes short-term and long-term capital gains on equities, certain mutual fund income, and winnings from lotteries or similar sources.
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For taxpayers with mixed income streams, this means careful planning is still essential. Salary income may enjoy full relief, but gains and special-category income can continue to attract tax.
Why it matters ahead of Budget 2026
As expectations build around Budget 2026, Section 87A stands out as an example of how subtle policy changes can have a big real-world impact. Whether the government chooses to extend, fine-tune, or build on this approach will be closely watched by millions of taxpayers looking for stability—and maybe a little more breathing room—in their annual tax bills.
