Zero income tax up to ₹12.75 lakh: how the rebate and marginal relief work

Where ₹12.75 lakh comes from

Two rules combine. First, every salaried person in the new regime gets a standard deduction of ₹75,000, taken off salary before any tax is worked out. Second, the rebate under Section 87A (Section 156 of the Income-tax Act, 2025) cancels the tax completely when taxable income is ₹12 lakh or less.

Put together, a salary of ₹12,75,000 becomes taxable income of ₹12,00,000, which falls within the rebate. The tax for Tax Year 2026-27 is zero. The slabs, rebate and standard deduction are unchanged from last year, so the limit is the same.

The slab tax that the rebate cancels

Taxable income of ₹12 lakh is not tax-free by slab. The slabs charge 5% from ₹4 lakh to ₹8 lakh and 10% from ₹8 lakh to ₹12 lakh:

• Up to ₹4,00,000: nil
• ₹4,00,000 to ₹8,00,000 at 5%: ₹20,000
• ₹8,00,000 to ₹12,00,000 at 10%: ₹40,000
• Slab tax on ₹12 lakh: ₹60,000, cancelled by a rebate of up to ₹60,000

Earning a little more: marginal relief

Without a safeguard, earning one rupee over ₹12 lakh of taxable income would suddenly cost more than ₹60,000 in tax. Marginal relief prevents that: the tax can never be more than the income above ₹12 lakh.

Take a salary of ₹12,85,000. Taxable income is ₹12,10,000. Slab tax would be ₹61,500, but marginal relief limits it to the ₹10,000 earned above ₹12 lakh. With 4% cess, the total is ₹10,400. You still keep more than someone earning ₹12,75,000, just not much more.

The relief fades out as income rises and stops at a taxable income of about ₹12,70,600, which is a salary of roughly ₹13.46 lakh. Above that, normal slab tax applies: a ₹13,50,000 salary pays about ₹74,100 including cess. If you are close to this range, small things like a bonus or FD interest decide which side of it you land, so run your own figures in the income tax calculator.

Income the rebate does not cover

The ₹12 lakh limit is about your total taxable income, not just salary. Interest from savings and fixed deposits, rent you receive and freelance profit all count towards it. Someone with ₹12,75,000 of salary and ₹40,000 of FD interest is over the limit.

Some income is taxed at special rates and the rebate cannot be used against it, most importantly capital gains on shares and equity mutual funds. If you sold shares at a profit during the year, that tax is payable even if your other income is within the limit.

Will my employer still deduct TDS?

If you are in the new regime and your projected taxable income for the year is within ₹12 lakh, your employer should not deduct income tax from your salary. If TDS appears on your payslip anyway, check that the employer has the right regime on record and the correct salary projection, including any bonus. Any excess TDS comes back as a refund when you file your return.

Filing the return is still worthwhile even when the tax is zero. It records your income, helps with loans and visas, and is the only way to get back tax deducted by a bank on your FD interest.

Should someone at this salary consider the old regime?

Almost never. To pay no tax under the old regime on a ₹12,75,000 salary, taxable income would have to come down to ₹5 lakh, which needs about ₹7.25 lakh of HRA exemption and deductions on top of the standard deduction. Very few people can claim that much.

At higher salaries the picture changes. At ₹18 lakh the old regime starts to win only once deductions pass about ₹6.4 lakh, and at ₹25 lakh about ₹8 lakh. People with a large rent in a metro city and a home loan sometimes get there. Our guide on old versus new regime explains how to think about the choice, and the salary calculator shows what either regime means for your monthly in-hand pay.