Income Tax Free Up to ₹12 Lakh? Section 87A Rebate Explained

"No tax up to ₹12 lakh" was the headline everyone remembered from Budget 2025. It's true — but the way it works confuses a lot of people, and the confusion costs real money when you're negotiating a hike or planning investments. Let's clear it up properly.

It's a rebate, not a bigger slab

The first thing to get right: the government did not make the 0% slab go up to ₹12 lakh. Under the new regime for FY 2025-26, the slabs are unchanged from what Budget 2025 announced:

• ₹0 to ₹4 lakh: nil
• ₹4 lakh to ₹8 lakh: 5%
• ₹8 lakh to ₹12 lakh: 10%
• ₹12 lakh to ₹16 lakh: 15%
• and so on, up to 30% above ₹24 lakh

So on a taxable income of exactly ₹12 lakh, the slab-wise tax is ₹20,000 (on the 4–8 lakh chunk) plus ₹40,000 (on the 8–12 lakh chunk) = ₹60,000.

Then Section 87A steps in. If your taxable income is up to ₹12 lakh, you get a rebate of up to ₹60,000 — exactly enough to cancel that tax. Net payable: zero.

The distinction matters because the slab tax is always computed first. The rebate is a discount applied at the end, and it has a hard eligibility line at ₹12 lakh of taxable income.

Why salaried people get ₹12.75 lakh, not ₹12 lakh

If you earn a salary, the new regime gives you a standard deduction of ₹75,000 — automatic, no proof, no bills. (We've covered it fully in the standard deduction guide.)

So the arithmetic for a salaried person:

• Gross salary: ₹12,75,000
• Less standard deduction: ₹75,000
• Taxable income: ₹12,00,000
• Slab tax: ₹60,000
• Section 87A rebate: ₹60,000
• Tax payable: ₹0

That's the famous ₹12.75 lakh figure — it's simply ₹12 lakh plus the standard deduction. If you have other deductions the new regime still allows (like employer NPS contribution), your tax-free salary ceiling can be even a bit higher. Plug your own CTC into the income tax calculator to see where you land.

What happens just above ₹12 lakh: marginal relief

Here's the scary-sounding scenario: your taxable income is ₹12,10,000 — just ₹10,000 over the line. You lose the rebate entirely. Does your tax suddenly jump from ₹0 to ₹61,500?

No — and this is where marginal relief saves you. The rule says your tax cannot exceed the amount by which your income crosses ₹12 lakh.

Worked example, taxable income ₹12,10,000:

• Normal slab tax: ₹20,000 + ₹40,000 + 15% of ₹10,000 = ₹61,500
• Income above ₹12 lakh: ₹10,000
• Marginal relief caps the tax at ₹10,000
• Add 4% cess: ₹10,400 total

So earning ₹10,000 extra costs you ₹10,000 in tax (plus a small cess) — painful in that narrow band, but far better than the ₹61,500 you'd owe without relief. The extra tax can never exceed the extra income itself.

Marginal relief keeps helping until roughly ₹12.7 lakh of taxable income, beyond which the normal slab tax becomes lower than the "excess over ₹12 lakh" anyway, and regular computation takes over.

If your salary hike lands you just above ₹12.75 lakh, don't refuse it. Marginal relief means more gross salary still leaves you with more in hand — just less dramatically than usual in that narrow band.

Common misconceptions, corrected

"Income above ₹12 lakh is taxed only on the excess." Wrong. Once you're past the rebate zone (and marginal relief band), the full slab structure applies to your entire taxable income. Someone with ₹15 lakh taxable income pays ₹20,000 + ₹40,000 + ₹45,000 = ₹1,05,000 plus cess — not 15% of ₹3 lakh.

"The first ₹12 lakh is always tax-free for everyone." Only if your total taxable income is within ₹12 lakh. Cross it meaningfully, and tax applies from ₹4 lakh onwards as per slabs.

"This applies to the old regime too." No. The old regime's 87A rebate is still only ₹12,500, available when taxable income is up to ₹5 lakh. The ₹60,000 rebate is a new-regime benefit. If you're torn between regimes, our new vs old regime comparison settles it with worked examples.

"All types of income get the rebate." Not quite. Certain special-rate incomes — like some capital gains — generally don't get covered by the 87A rebate. If you have equity gains or other special-rate income alongside salary, check with a CA before assuming zero tax.

"Zero tax means I don't need to file a return." Filing may still be required or beneficial — for instance, to claim a refund of TDS your employer deducted. Don't skip the return just because the payable is nil; see our ITR filing guide for salaried taxpayers.

What this means for your take-home

If your CTC translates to a gross salary of up to ₹12.75 lakh, your income tax for FY 2025-26 under the new regime is zero — though PF, professional tax and other deductions still apply to your payslip, so your monthly credit will differ from a simple gross-divided-by-twelve figure.

And if your employer's TDS has already been cut assuming the wrong regime, don't panic — you can pick the new regime at filing time and get the excess back as a refund.

The short version

• Slabs still start at ₹4 lakh; ₹12 lakh is a rebate threshold, not a slab.
• Salaried? The magic number is ₹12.75 lakh of gross salary, thanks to the ₹75,000 standard deduction.
• Just above the line? Marginal relief stops the cliff from hurting too much, up to roughly ₹12.7 lakh taxable.
• Above that, normal slab tax applies to the whole income — plan accordingly.