Income Up to ₹12 Lakh Tax-Free FY 2025-26 – Section 87A Explained

How Income Up to ₹12 Lakh becomes effectively Tax-Free in India (FY 2025-26 / AY 2026-27)

Understanding how income up to ₹12 lakh can be effectively tax-free under the new tax regime can be confusing because the slabs still show rates like 5% and 10%. But with the Section 87A rebate, standard deduction, and the updated slab structure, many taxpayers end up paying zero income tax up to this threshold.

Key Changes in FY 2025 – New Tax Regime

• Section 87A rebate threshold increased to ₹12 lakh
• Maximum rebate amount: ₹60,000
• Standard deduction for salaried taxpayers: ₹75,000
• Special-rate incomes like STCG or LTCG do not qualify for this rebate

New Tax Regime Slabs (FY 2025-26 / AY 2026-27)

Income Range (₹)	Tax Rate
Up to 3,00,000	Nil
3,00,001 – 7,00,000	5%
7,00,001 – 10,00,000	10%
10,00,001 – 12,00,000	15%
12,00,001 – 15,00,000	20%
Above 15,00,000	30%

Why ₹12 Lakh Can Be Effectively Tax-Free

Step-by-Step Calculation:

• Gross Salary: ₹12,75,000
• Apply Standard Deduction ₹75,000 → Net Taxable Income = ₹12,00,000
• Tax Calculation: 0–3L → ₹0, 3–7L → 5% = ₹20,000, 7–12L → 10% = ₹50,000 → Total Tax = ₹70,000
• Apply Section 87A rebate (max ₹60,000) → Tax Payable = ₹10,000 or less

Thus, most salaried taxpayers pay zero or negligible tax up to a gross income of ~₹12.75 lakh.

Section 87A Rebate Explained

Section 87A provides a rebate on total tax payable for resident individuals if net taxable income ≤ ₹12,00,000. Maximum rebate is ₹60,000. This rebate effectively reduces tax liability to zero for most middle-class taxpayers.

How Tax is Reduced to Zero

1. Gross Salary: ₹12,75,000 💰
2. Standard Deduction: ₹75,000 ➖ = Net Taxable Income: ₹12,00,000
3. Tax Calculation:
   • 0–3L → ₹0
   • 3–7L → 5% = ₹20,000
   • 7–12L → 10% = ₹50,000
   Total Tax = ₹70,000
4. Apply Section 87A Rebate: ₹60,000 ✔
5. Final Tax Payable = ₹0 🎉

Conditions & Notes from Government Rules

• Standard deduction allowed for salaried individuals
• Section 87A rebate applies only if net taxable income ≤ ₹12,00,000
• Special incomes like STCG/LTCG are taxed separately
• ITR filing is mandatory to claim a rebate
• Income slightly above ₹12 lakh → tax applies as per slabs

Practical Summary

Income (₹)	Effective Tax (New Regime)
Up to 12,00,000	0 (after 87A rebate)
12,00,001 – 15,00,000	Tax as per slab
Above 15,00,000	Tax as per slab + surcharge + cess

Takeaway

Thanks to standard deduction, updated slab rates, and enhanced Section 87A rebate, salaried taxpayers earning up to ~₹12.75 lakh effectively pay zero income tax in FY 2025-26 under the new tax regime.