Zero Income Tax Up to ₹12 Lakh — Budget 2025 Explained

Updated: 3 June 2026 | New Tax Regime | FY 2025-26 (AY 2026-27)

Budget 2025 made income up to ₹12 lakh completely tax-free under the new tax regime for FY 2025-26 (AY 2026-27). How: new regime slabs produce ₹60,000 tax on ₹12L income, and the Section 87A rebate of ₹60,000 cancels it entirely. For salaried employees, a gross salary of ₹12,75,000 results in zero tax (₹12.75L minus ₹75K standard deduction = ₹12L net income).

₹0 TAX

On income up to ₹12,00,000 — new regime, FY 2025-26
Salaried: zero tax on gross salary up to ₹12,75,000 (after ₹75K standard deduction)

⚠

New regime only. The ₹12L zero-tax benefit applies exclusively under the new tax regime. Under the old regime, the 87A rebate is ₹12,500 (applicable up to ₹5L income only). Choose your regime carefully at the start of the financial year.

How ₹12 Lakh Income Becomes Zero Tax — Step by Step

Calculation: ₹12,00,000 Total Income (New Regime)

Income slab 0 – ₹4L @ 0%₹0

Income slab ₹4L – ₹8L @ 5%₹20,000

Income slab ₹8L – ₹12L @ 10%₹40,000

Gross Tax (before rebate)₹60,000

Section 87A Rebate (Budget 2025)− ₹60,000

Net Tax Payable₹ 0

Salaried: ₹12,75,000 Gross Salary → Zero Tax

Gross Salary₹12,75,000

Less: Standard Deduction (New Regime)− ₹75,000

Net Taxable Income₹12,00,000

Tax on ₹12L (new slabs)₹60,000

Less: 87A Rebate− ₹60,000

Net Tax + Cess₹ 0

Tax Payable at Different Income Levels (New Regime, FY 2025-26)

Gross Income	Standard Deduction (Salaried)	Net Taxable Income	Tax (Before Rebate)	87A Rebate	Net Tax Payable
₹6,00,000	₹75,000	₹5,25,000	₹6,250	₹6,250	₹0
₹8,00,000	₹75,000	₹7,25,000	₹16,250	₹16,250	₹0
₹10,00,000	₹75,000	₹9,25,000	₹32,500	₹32,500	₹0
₹12,00,000	₹75,000	₹11,25,000	₹52,500	₹52,500	₹0
₹12,75,000	₹75,000	₹12,00,000	₹60,000	₹60,000	₹0
₹13,00,000	₹75,000	₹12,25,000	₹63,750	—	₹66,300 (+ cess)
₹15,00,000	₹75,000	₹14,25,000	₹97,500	—	₹1,01,400 (+ cess)
₹20,00,000	₹75,000	₹19,25,000	₹2,01,250	—	₹2,09,300 (+ cess)

New Regime Tax Slabs — FY 2025-26 (Budget 2025)

Income Slab	Tax Rate	Tax on Slab
Up to ₹4,00,000	0%	₹0
₹4,00,001 – ₹8,00,000	5%	₹20,000
₹8,00,001 – ₹12,00,000	10%	₹40,000
₹12,00,001 – ₹16,00,000	15%	₹60,000
₹16,00,001 – ₹20,00,000	20%	₹80,000
₹20,00,001 – ₹24,00,000	25%	₹1,00,000
Above ₹24,00,000	30%	30% on balance

Note: 4% Health and Education Cess applies on computed tax. Surcharge applies at higher income levels (above ₹50L).

Marginal Relief — Income Just Above ₹12 Lakh

For income marginally above ₹12L, tax payable is capped so it does not exceed the income above ₹12L. Example: income of ₹12,10,000 — the incremental income above ₹12L is ₹10,000, so net tax cannot exceed ₹10,000 (even though computed tax would be higher). This prevents a sudden tax spike for crossing the threshold by a small amount. Marginal relief ceases to apply beyond ₹12,75,000 for salaried individuals.

Budget 2025 — Key Change: Section 87A rebate was enhanced from ₹12,500 (applicable up to ₹5L income) to ₹60,000 (applicable up to ₹12L income under new regime). This single change is what makes the ₹12L zero-tax announcement possible. The rebate equals the maximum tax that can arise on ₹12L under the revised new regime slabs.

Frequently Asked Questions

Is ₹12 lakh income tax-free under the old tax regime too?

No. The zero-tax benefit up to ₹12 lakh applies only under the new tax regime. Under the old regime, the Section 87A rebate is ₹12,500 and applies only when income is up to ₹5 lakh, making income up to ₹5L effectively tax-free. The new regime's enhanced 87A rebate of ₹60,000 (Budget 2025) is what makes ₹12L income zero-tax. To benefit from the ₹12L zero-tax, you must be in the new regime.

Does capital gains income count toward the ₹12 lakh zero-tax threshold?

Partially. Special-rate incomes like short-term capital gains (STCG at 20%) and long-term capital gains (LTCG at 12.5%) are excluded from the 87A rebate for such special-rate income. For example, if your salary is ₹10L and STCG is ₹3L, total income is ₹13L — the STCG portion is taxed at 20% without rebate. The rebate applies only against tax on normal income up to ₹12L. Budget 2025 clarified this separation explicitly.

What about income from ₹12L to ₹12.75L — is it fully taxable?

Marginal relief applies for income slightly above ₹12L. For income between ₹12L and ₹12.75L, the tax payable will not exceed the income earned above ₹12L. For example, if income is ₹12.10L, the additional tax cannot exceed ₹10,000 (the amount above ₹12L). This marginal relief prevents a situation where crossing ₹12L by ₹1 causes a large tax jump. Above ₹12.75L, normal slab rates apply with no marginal relief.

Can a salaried employee with ₹12.75L gross salary pay zero tax?

Yes. For salaried employees under the new regime: Gross salary ₹12,75,000 minus Standard Deduction ₹75,000 = Net taxable income ₹12,00,000. On ₹12L: tax under new slabs = ₹60,000. Section 87A rebate = ₹60,000. Net tax payable = ₹0. This is the exact Budget 2025 design. Note: the standard deduction under the new regime is ₹75,000 (increased from ₹50,000 in Budget 2024). Non-salaried individuals need income of exactly ₹12L or less for zero tax.

What is the new regime slab structure for FY 2025-26 under Budget 2025?

The new tax regime slabs for FY 2025-26 (AY 2026-27) are: ₹0–4L: 0%; ₹4L–8L: 5%; ₹8L–12L: 10%; ₹12L–16L: 15%; ₹16L–20L: 20%; ₹20L–24L: 25%; Above ₹24L: 30%. These revised slabs were announced in Budget 2025 (Union Budget FY 2025-26). The Section 87A rebate of ₹60,000 ensures zero tax for incomes up to ₹12L. A 4% health and education cess applies on top of the final tax after rebate.

Income Tax Slabs 2025-26 Old vs New Regime Tax Calculator Standard Deduction Tax Saving Investments Section 87A Rebate

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