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

"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.

The same mechanism reappears higher up. Above ₹50 lakh a surcharge switches on, creating an identical cliff, and marginal relief cushions that threshold the same way. If your income is anywhere near that line, the surcharge and marginal relief guide works through it with a full example.

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.

Frequently asked questions

Is income up to ₹12 lakh really tax free?

Yes, under the new tax regime for FY 2025-26, provided your taxable income does not exceed ₹12 lakh. The slab tax of ₹60,000 is still computed, and the Section 87A rebate of up to ₹60,000 then cancels it, leaving nil payable. It is a rebate at the end of the calculation, not a change to the slabs.

What is the Section 87A rebate in the new tax regime?

It is a rebate of up to ₹60,000 available when taxable income is up to ₹12 lakh under the new regime. It is applied after the slab tax is computed, which is why the slabs still show 5% from ₹4 lakh and 10% from ₹8 lakh even though the final tax is zero.

Does the ₹12 lakh rebate apply under the old tax regime?

No. The old regime's Section 87A rebate remains ₹12,500, available when taxable income is up to ₹5 lakh. The ₹60,000 rebate and the ₹12 lakh threshold are new-regime benefits only.

Why do salaried employees get ₹12.75 lakh tax free?

Because the new regime allows a standard deduction of ₹75,000 on salary income. A gross salary of ₹12,75,000 minus that deduction leaves taxable income of exactly ₹12 lakh, which is the rebate threshold. The figure is simply ₹12 lakh plus the standard deduction.

What happens if my income is just above ₹12 lakh?

Marginal relief applies. Your tax cannot exceed the amount by which your income crosses ₹12 lakh. At ₹12,10,000 taxable, the normal slab tax would be ₹61,500, but relief caps it at the ₹10,000 of excess income, plus 4% cess. Relief keeps helping until roughly ₹12.7 lakh of taxable income.

Do I still need to file a return if my tax is zero?

Often yes. A nil tax liability does not automatically remove the filing obligation, and filing is how you reclaim TDS your employer has already deducted. See the ITR filing guide for salaried taxpayers.

Does the rebate cover capital gains?

Not generally. Certain special-rate incomes, including some capital gains, fall outside the 87A rebate. If you have equity gains alongside salary, check the treatment with a CA rather than assuming the whole amount is covered.