New Tax Regime: Why ₹12 Lakh Salary Isn't Actually Your Tax-Free Limit
Under the new regime for FY 2025-26, the ₹12 lakh limit is on taxable income, not salary. Salaried individuals also get a ₹75,000 standard deduction, so a gross salary up to ₹12.75 lakh brings taxable income down to ₹12 lakh — which the Section 87A rebate wipes out to zero tax.
You have probably seen the headline a hundred times: "No tax up to ₹12 lakh under the new regime." It is technically true, but it quietly drops the most useful detail for anyone earning a salary — the real number for you is ₹12.75 lakh, not ₹12 lakh.
The gap exists because of one word that most articles skip: taxable. The ₹12 lakh figure is a limit on taxable income, not on your salary. Once you account for the standard deduction that salaried individuals automatically get, the salary you can earn tax-free climbs higher.
Where the ₹12 lakh number actually comes from
For FY 2025-26 (AY 2026-27), the new regime offers a Section 87A rebate that fully cancels your tax if your taxable income is ₹12 lakh or less. Here is how that plays out against the new slabs:
| Taxable slab | Rate | Tax on this slab |
|---|---|---|
| ₹0 – ₹4,00,000 | 0% | ₹0 |
| ₹4,00,001 – ₹8,00,000 | 5% | ₹20,000 |
| ₹8,00,001 – ₹12,00,000 | 10% | ₹40,000 |
| Tax before rebate | ₹60,000 | |
| Section 87A rebate | −₹60,000 | |
| Tax payable | ₹0 |
So at exactly ₹12 lakh of taxable income, the slab tax of ₹60,000 is entirely wiped out by the rebate. That is the source of the "₹12 lakh tax free" claim — and it is correct, as far as it goes.
The part most articles leave out: the ₹75,000 standard deduction
If you draw a salary or pension, the new regime gives you a flat ₹75,000 standard deduction before any tax is calculated. That deduction comes off the top automatically — you do not have to invest anything or submit proofs.
That changes the math. The ₹12 lakh ceiling is on taxable income, and your taxable income is your salary minus the standard deduction:
Gross salary = 12,75,000
Less standard deduction = −75,000
Taxable income = 12,00,000 → rebate applies → ₹0 tax
A gross salary of ₹12.75 lakh lands exactly on the ₹12 lakh taxable threshold. So for a salaried person, the genuine tax-free salary limit is ₹12.75 lakh, not ₹12 lakh.
Why this nuance matters
The distinction is not pedantic — it changes real decisions:
- You might be undercounting your tax-free room. If you earn ₹12.6 lakh and assume you have crossed the limit, you may worry about a tax bill that does not exist.
- It is salary-specific. The ₹75,000 cushion comes from the salary standard deduction. If your ₹12.75 lakh is business profit or interest income, you do not get it, and your ceiling stays at ₹12 lakh of taxable income.
- It does not apply to the old regime. The old regime gives a smaller ₹50,000 standard deduction and only rebates taxable income up to ₹5 lakh, so none of this ₹12.75 lakh logic carries over.
What if you earn just over ₹12.75 lakh?
This is the other place people panic. Crossing the threshold does not mean your entire income suddenly becomes taxable. A marginal relief rule ensures your tax never exceeds the amount you earned above ₹12 lakh of taxable income.
For instance, at ₹12.1 lakh taxable income the normal slab tax would be about ₹61,500 — but you only earned ₹10,000 over the ₹12 lakh line, so marginal relief caps your tax at roughly ₹10,000 (plus 4% cess). You keep almost all of that extra income.
Check your own exact number
Slab tables and rebate rules are easy to misread, especially around the ₹12–12.75 lakh band where the standard deduction, the rebate, and marginal relief all interact. Rather than eyeball it, run your figure through the Income Tax Calculator at TinyToolStudio.
Enter your gross salary and it will:
- Apply the ₹75,000 standard deduction and the Section 87A rebate automatically.
- Show your exact tax under both the new and old regimes side by side.
- Handle marginal relief for incomes just above the ₹12 lakh threshold.
It runs entirely in your browser, needs no signup, and your salary details never leave your device.
The short version
"₹12 lakh tax free" is shorthand for "₹12 lakh of taxable income qualifies for a full rebate." For salaried earners, the ₹75,000 standard deduction stretches that into a ₹12.75 lakh gross salary with zero tax — and even past that point, marginal relief keeps the bill tied to the income above the line, not the whole amount.
Try it free → www.tinytoolstudio.com/tools/income-tax-calculator
Frequently Asked Questions
- Is the tax-free limit ₹12 lakh or ₹12.75 lakh under the new regime?
- Both are correct, but they measure different things. ₹12 lakh is the limit on taxable income that qualifies for the full Section 87A rebate. ₹12.75 lakh is the gross salary a salaried person can earn, because the ₹75,000 standard deduction reduces ₹12.75 lakh to exactly ₹12 lakh of taxable income, which then attracts zero tax after the rebate.
- Does the ₹12.75 lakh figure apply to everyone?
- No. The extra ₹75,000 cushion comes from the salary standard deduction, so it only applies to people with salary or pension income. Someone whose ₹12.75 lakh is purely business profit or interest income does not get the standard deduction, so their tax-free ceiling stays at ₹12 lakh of taxable income.
- What happens if my taxable income is just above ₹12 lakh?
- You do not suddenly owe tax on the whole amount. A marginal relief provision caps your tax so it never exceeds the income earned beyond ₹12 lakh. For example, at ₹12.1 lakh taxable the slab tax would be ₹61,500, but marginal relief limits the payable tax to about ₹10,000 (plus 4% cess).
- Is the ₹75,000 standard deduction part of the old regime too?
- No. The old regime gives a smaller ₹50,000 standard deduction, and its Section 87A rebate only covers taxable income up to ₹5 lakh. The enhanced ₹75,000 standard deduction and the ₹12 lakh rebate ceiling are specific to the new regime for FY 2025-26.