Is income up to ₹12 lakh really tax-free under the new regime?

How the rebate works

The ₹12 lakh limit is not a higher basic exemption. Tax is first worked out on the slabs, and then a rebate of up to ₹60,000 is deducted from it. Up to ₹12 lakh the slab tax is exactly ₹60,000 or less, so it is fully cancelled.

The limit is tested on total income, that is, after the standard deduction and any deductions allowed in the regime you choose.

Just above ₹12 lakh: marginal relief

Without relief, someone earning ₹12,10,000 would pay ₹61,500 on the slabs, while someone at ₹12,00,000 pays nothing. Marginal relief caps the tax at the amount by which income exceeds ₹12 lakh. So at ₹12,10,000 the tax is ₹10,000, plus 4% cess, ₹10,400. The relief fades out at a total income of about ₹12.7 lakh, beyond which the normal slab tax applies.

Who does not get it

• Non-residents, and HUFs, firms and companies: the rebate is only for resident individuals.
• Tax on special-rate income: the rebate cannot be set against tax on income taxed at special rates, such as short-term and long-term capital gains on listed shares and equity mutual funds, or lottery winnings. That income still counts towards the ₹12 lakh test. For FY 2024-25 this point was disputed and taken to court; from FY 2025-26 the law states it expressly.

Example. Salary ₹9,00,000 (₹8,25,000 after the standard deduction) and short-term gains on listed shares of ₹3,00,000. Total income is ₹11,25,000, within ₹12 lakh, so the rebate removes the ₹22,500 slab tax on the salary. But the 20% tax on the gains, ₹60,000 plus cess, is still payable. (Had the salary been below ₹4 lakh, the unused part of the nil slab would first reduce the gains taxed.)

Which Act and year

For FY 2025-26 (returns being filed now) the rebate is under section 87A of the 1961 Act. For tax year 2026-27 onwards it is section 156 of the Income-tax Act, 2025, with the same ₹12 lakh and ₹60,000 figures. Check your own figures, including marginal relief, with the income tax calculator.