Zero Tax up to ₹12.75 Lakh? The New 2026 Rules Every Salaried Professional Must See

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If you’re earning a decent salary and dreading your annual tax calculation, we have some fantastic news. The Union Budget 2025 brought relief that could fundamentally change how much you actually owe the government. Starting from the financial year 2025-26, salaried professionals earning up to ₹12.75 lakh annually can now pay zero income tax. Yes, you read that right—completely tax-free.

But hold on. Before you celebrate too enthusiastically, there’s more to this story than the headline suggests. This guide breaks down everything you need to know about the new tax-free income threshold, how it works, and whether your salary actually qualifies for this windfall.

Understanding the ₹12.75 Lakh Tax-Free Income Threshold

Let’s start with the basics. The ₹12.75 lakh figure isn’t a random number pulled out of thin air. It’s a combination of two components:

₹12 lakh + ₹75,000 standard deduction = ₹12.75 lakh

Under the new tax regime for salaried professionals, the government raised the tax-free income ceiling to ₹12 lakh. On top of that, salaried individuals can claim a standard deduction of ₹75,000 from their gross salary, effectively pushing the tax-free threshold to ₹12.75 lakh. This represents a substantial jump from previous years—just three years ago, the tax-free limit was only ₹7 lakh.

The Role of Section 87A Rebate

The real magic behind this tax relief comes from Section 87A of the Income Tax Act, which provides a rebate on your tax liability. In the 2025 budget, the rebate amount was nearly tripled from ₹25,000 to ₹60,000 for those earning up to ₹12 lakh. This rebate essentially brings your tax liability down to zero if your income doesn’t exceed this threshold.

Here’s how it works in practice: If your taxable income after the standard deduction falls within the 10% tax slab, the Section 87A rebate covers your entire tax bill, leaving you with no income tax to pay.

Who Actually Benefits from This Tax-Free Income?

This is where it gets important to understand the fine print. The ₹12.75 lakh tax-free income benefit primarily applies to salaried professionals in India who:

  • Earn a fixed salary from their employer
  • Opt for the new tax regime (which is now the default)
  • Don’t have additional sources of special income like capital gains

If you’re a salaried employee earning ₹12.75 lakh or less annually and your income is purely salary-based, congratulations—you pay zero income tax on that earnings. You won’t need to file an ITR if your income doesn’t exceed this limit, though voluntary filing has its benefits.

New Tax Regime vs. Old Tax Regime: Which Is Better?

The introduction of this tax-free income ceiling makes the new tax regime increasingly attractive for middle-income earners. Let’s look at how they compare:

Under the New Tax Regime:

  • Tax-free income: ₹12.75 lakh (with standard deduction)
  • Tax rebate: ₹60,000 under Section 87A
  • No deductions allowed for investment-based savings (80C, 80D, etc.)
  • Lower tax slabs: 5% starts at ₹4 lakh, 10% at ₹8 lakh
  • Better for those with fewer tax-saving investments

Under the Old Tax Regime:

  • Basic exemption: ₹2.5 lakh (for general individuals)
  • Tax rebate: ₹12,500 under Section 87A (for income up to ₹5 lakh)
  • Deductions available: ₹80C (₹1.5 lakh), ₹80D (health insurance), ₹80E (education loan interest)
  • Better for those with substantial investments and deductions

For most salaried professionals earning up to ₹12.75 lakh without major tax-saving investments, the new regime is now a clear winner.

Important Limitations You Must Know

Before you assume you’re getting a free pass on taxes, understand these critical limitations:

Capital Gains Are Treated Separately: This is the big catch that trips up many taxpayers. If your income includes capital gains—whether from selling stocks, mutual funds, or property—those are taxed at special rates and are not eligible for the Section 87A rebate. Let’s say you earn ₹11 lakh in salary and ₹2 lakh in capital gains. Your salary qualifies for the rebate and is tax-free, but the ₹2 lakh in gains will be taxed separately at the applicable rate (either 15% for short-term or 20% for long-term capital gains).

Only Salary Income Qualifies: The tax-free income benefit applies exclusively to salary income and earnings that fall within normal income categories. Rental income, business income, and other special sources don’t qualify for the same rebate structure.

Standard Deduction Has Limits: While the ₹75,000 standard deduction is generous, it’s only available to salaried individuals. If you have business or professional income, you follow different rules.

Practical Examples: How It Works in Real Life

Example 1: Pure Salaried Professional

Meet Rajesh, a software engineer earning ₹12.5 lakh annually.

  • Gross salary: ₹12,50,000
  • Standard deduction: -₹75,000
  • Taxable income: ₹11,75,000
  • Tax calculated on income up to ₹12 lakh = ₹60,000
  • Section 87A rebate: -₹60,000
  • Tax payable: ₹0

Rajesh pays zero income tax.

Example 2: Salaried Professional with Capital Gains

Now consider Priya, earning ₹11 lakh in salary plus ₹1 lakh in short-term capital gains.

  • Salary income: ₹11,00,000
  • Standard deduction: -₹75,000
  • Net salary taxable income: ₹10,25,000
  • Tax on salary: ₹37,500
  • Section 87A rebate on salary: -₹37,500
  • Tax on short-term capital gains (20% + 4% cess): ≈ ₹20,800
  • Total tax payable: ≈ ₹20,800

Priya’s capital gains prevent her from achieving complete tax-free status, even though her total income is under ₹12 lakh.

Updated Income Tax Slabs for FY 2025-26

Understanding the new tax slabs helps you estimate your liability accurately:

Income RangeTax Rate
Up to ₹4 lakhNil
₹4 lakh – ₹8 lakh5%
₹8 lakh – ₹12 lakh10%
₹12 lakh – ₹16 lakh15%
₹16 lakh – ₹20 lakh20%
₹20 lakh – ₹24 lakh25%
Above ₹24 lakh30%

These progressive slab rates mean you only pay the higher rate on income within that bracket, not on your entire earnings.

How to Calculate Your Income Tax Online

Most salaried professionals don’t need to manually calculate their tax anymore. You can use an income tax calculator online by entering:

  • Gross salary and allowances
  • Standard deduction (₹75,000)
  • Any additional income sources
  • TDS already deducted
  • Your chosen tax regime

The calculator will instantly show your tax liability. The Income Tax Department’s official website and numerous fintech platforms offer free income tax calculators specifically designed for the 2025-26 financial year.

Should You File an Income Tax Return (ITR)?

Even if you’re completely tax-free under the new regime, filing an ITR has advantages:

  • You’ll receive a formal tax assessment
  • It establishes a clean financial record
  • Future loan approvals may require ITR history
  • You can claim refunds if TDS was deducted from your salary
  • It’s proof of your earnings for official purposes

Filing ITR for salaried professionals has become incredibly easy through the new e-filing portal. The ITR-1 form (Sahaj) takes around 20-30 minutes if you have your salary statement handy.

Tax Planning Strategies for Maximum Benefits

While the new tax-free income is great, consider these strategies to optimize your overall tax situation:

Option 1: Utilize Your Tax-Free Window
If you’re earning close to ₹12.75 lakh, avoid taking additional taxable income that would push you over the limit. Any income beyond this threshold gets taxed at 15%, eating into your savings.

Option 2: Compare Both Regimes Before Filing
Even though the new regime appears better, run your numbers through both regimes. If you have substantial investments under Section 80C (PPF, ELSS, Home Loan Repayment), the old regime might still offer better overall tax savings.

Option 3: Review Your NPS Contributions
Employer contributions to your NPS account (up to 14% of basic salary) are deductible and don’t count as part of your taxable income in either regime, making it an excellent tax-efficient benefit.

Option 4: Plan Capital Gains Strategically
If you invest in stocks or mutual funds, be mindful of your capital gains. Spread investments across multiple years to stay below the ₹12 lakh threshold for individual assessment years.

Common Questions About the New Tax-Free Income

Q: If I earn exactly ₹12.75 lakh, do I pay zero tax?
A: Yes, if that income is purely salary-based and you claim the standard deduction under the new regime. No capital gains or special income should be mixed in.

Q: Can I switch back and forth between regimes every year?
A: Yes. You can choose your tax regime while filing your ITR each year, though some restrictions exist if you’ve declared your preference in a previous year.

Q: What if my employer deducts TDS beyond my actual tax liability?
A: File your ITR showing the actual tax payable (which is zero if you’re under ₹12.75 lakh), and the tax department will refund the excess TDS automatically.

Q: Does the ₹12.75 lakh limit apply to senior citizens or super-senior citizens?
A: No. Senior citizens (above 60) have higher exemption limits, and the tax slabs differ for them. Consult a tax professional if this applies to you.

Q: What happens if I exceed ₹12.75 lakh in one particular year?
A: Only the amount exceeding ₹12.75 lakh gets taxed at the applicable slab rate (15% for income between ₹12 lakh and ₹16 lakh). Your first ₹12.75 lakh remains tax-free.

The Bottom Line

The ₹12.75 lakh tax-free income under the new tax regime for FY 2025-26 represents a significant win for the Indian middle class. For salaried professionals earning up to this limit without substantial capital gains or other special income sources, the tax relief is real and substantial.

However, this isn’t a one-size-fits-all benefit. Understanding the nuances—especially regarding capital gains, regime selection, and standard deduction rules—ensures you maximize your tax savings legitimately and avoid surprises during ITR filing season.

The new tax regime continues to evolve, and the income tax calculator tools available today make it easier than ever to plan your finances accurately. Don’t hesitate to use these tools or consult a tax professional to confirm your specific situation, especially if your income is varied or includes non-salary sources.

Start planning your taxes early, understand your regime options, and take full advantage of the tax-free income threshold designed to benefit professionals like you. Your hard-earned money deserves to stay in your pocket, not the government’s.

Disclaimer: This article is for informational purposes only and should not be considered professional tax advice. Tax laws are complex and individual circumstances vary. Consult with a qualified tax professional or Chartered Accountant before making any tax planning decisions specific to your situation.

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