Standard Deduction and Section 87A Rebate FY 2026-27: New Tax Regime

Many salaried employees are surprised when a calculator shows income tax as zero even though slab tax is greater than zero. This usually happens because of the combination of standard deduction and Section 87A rebate under the new tax regime.

What is standard deduction?

Standard deduction is a flat deduction from salary income. It reduces taxable income before slab tax is calculated.

For FY 2025-26, the new tax regime standard deduction for salaried individuals is Rs 75,000.

That means:

• Gross salary: Rs 12,50,000
• Less standard deduction: Rs 75,000
• Taxable income: Rs 11,75,000

The calculator applies this before calculating slab tax.

What is Section 87A rebate?

Section 87A rebate reduces tax payable when taxable income is within the eligible limit.

Under the new tax regime, salaried employees can effectively have no income tax up to Rs 12.75 lakh gross salary income because Rs 75,000 standard deduction can bring taxable income to Rs 12 lakh.

This is why a user may see:

• Slab tax before rebate: greater than zero
• Section 87A rebate: offsets the slab tax
• Tax after rebate: Rs 0
• 4% cess: Rs 0
• Final income tax: Rs 0

Example at Rs 12 LPA CTC

The exact answer depends on salary structure, but a common flow is:

• CTC includes employer PF and gratuity
• Gross salary is lower than CTC
• Standard deduction reduces taxable income
• If taxable income stays within the rebate limit, final income tax becomes zero

Income tax is not zero because slabs do not apply. It becomes zero because the rebate cancels the calculated slab tax.

Why cess can be zero

Cess is calculated after rebate. If Section 87A rebate reduces tax after rebate to zero, then 4% cess is also zero.

That is why the calculator now shows:

• Slab tax before rebate
• Less: Section 87A rebate
• Tax after rebate
• Add: 4% cess
• Final income tax

This makes the tax calculation easier to trust.

Old regime is different

The old regime has different slab limits and deduction rules. It can still be useful if you have large deductions such as HRA exemption, 80C, NPS, home loan interest, or health insurance.

Always compare both regimes before making a tax declaration.