This is the single most common client conversation of the filing season: the income is inside the rebate limit, the client has read that there is no tax to pay, and the computation shows tax anyway.
The client is not wrong about the limit. The rebate does not work the way the headline suggests, and the gap is almost always capital gains.
From tax year 2026-27 it also has a different section number, which makes every older explanation harder to search for. Here is the provision as it stands.
Same rebate, new number
Under the Income-tax Act, 1961 the rebate for a resident individual is section 87A. Under the Income-tax Act, 2025, which governs from 1 April 2026, it is section 156.
The structure carried across intact:
- the old regime rebate sits in section 156(1);
- the default regime rebate sits in section 156(2)(a);
- the marginal relief sits in section 156(2)(b);
- the ceiling that keeps the rebate to slab tax sits in section 156(3).
For the default regime, section 156(2)(a) reads: "the income does not exceed twelve lakh rupees, 100% of the income-tax payable or Rs 60,000, whichever is less".
So twelve lakh is the eligibility line and sixty thousand is the most the rebate can ever be. Those are two separate limits and clients routinely hear only the first.
Why a client just over the line is not wiped out
Without a further provision, a rupee of extra income above the limit would cost tens of thousands in tax, because the rebate would vanish entirely.
Section 156(2)(b) is the marginal relief that prevents exactly that. The additional tax is held to the additional income over the threshold, so crossing the line by a small amount costs the small amount rather than the whole rebate.
This is worth explaining to a client in advance rather than in March, because it changes the advice. A client who believes the limit is a cliff will do odd things in the last fortnight of the year to stay under it. A client who understands the marginal relief will not.
Pro tip
When a client asks whether to defer income to stay under the limit, work the marginal relief first. The answer is usually that it does not matter nearly as much as they think.
The ceiling that catches everybody
Here is the provision that produces the surprise.
Section 156(3): "The deduction under sub-section (2), shall not exceed income-tax payable as per the rates provided in section 202(1)." Section 202(1) is the slab rates.
So the rebate is capped at the tax computed at slab rates. It cannot reduce tax charged at a special rate, and capital gains are charged at special rates: sections 196, 197 and 198 of the 2025 Act, which were 111A, 112 and 112A under the 1961 Act.
The practical consequence, in the order a client experiences it:
So the client with eleven lakh of salary and a lakh of listed long-term gains is inside the twelve lakh limit, gets the rebate against the slab tax, and still pays tax on the gain. The computation is right and the expectation was wrong.
- Total income is inside the limit, so the rebate is available
- The rebate is applied against tax at slab rates
- Tax on capital gains is charged at its own rate, outside that
- The rebate does not reach it, and tax remains payable
And it is explicit for listed long-term gains
In case there were any doubt about the long-term gains on listed securities specifically, the Act says so directly.
Section 198(7), which was section 112A(6) under the 1961 Act: "Where the total income of an assessee includes any long-term capital gains referred to in sub-section (1), the rebate under section 156 shall be allowed from the income-tax on the total income as reduced by tax payable on such capital gains."
The tax on those gains is taken out first, and the rebate is applied to what is left. It is the same answer as the 156(3) ceiling, stated again for the one case clients ask about most.
Both regimes, incidentally. This is not a reason to prefer the old regime.
Important
Explaining this after the return is filed is a much harder conversation than explaining it when the client sells. A client who sold listed shares during the year should hear it in the same call.
How to check this without memorising it
Three habits remove nearly all of the risk here.
Keep the limits dated. The eligibility limit and the maximum rebate are figures that move. Held as a dated entry quoting the provision, with the source and the date it was read, a stale figure is visible. Typed into a spreadsheet template, it is not.
Keep the regime explicit on the working paper. The old regime and the default regime have different rebates under different sub-sections, and a working paper that does not say which regime it is computing cannot be reviewed.
Show the split. A computation that shows slab tax and special-rate tax on separate lines makes the whole question obvious at a glance, and makes the client conversation two sentences instead of twenty.
And where a rule has not been verified for the year being computed, the honest output is no figure with the reason, not last year's figure. Greenote treats an unverified entry as a gap for exactly this reason.
Conclusion
The rebate is a relief against slab tax. It has never been a relief against capital gains tax, the Act now says so in two separate places, and from tax year 2026-27 it says it under section 156 rather than section 87A.
The twelve lakh figure is an eligibility limit, sixty thousand is the ceiling on the relief itself, and the marginal relief smooths the edge. None of those three is what a client has read on the internet.
Greenote holds each of these as a dated entry quoting the Gazette text, applies the rebate against slab tax only, and shows the special-rate tax on its own line so the gap is visible before the client asks. See what the return workspace covers, or read which ITR form the client can use.
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