- Income up to ₹12 lakh is not exempt, but neutralized by Section 87A rebates for residents.
- Salaried employees can reach zero tax on ₹12.75 lakh using the standard deduction.
- The benefit excludes non-resident Indians and certain capital gains taxed at special rates.
(INDIA) — Indian taxpayers preparing returns for AY 2026-27 are recalculating liability under the new regime as a widely repeated claim that income up to ₹12 lakh attracts “zero tax” draws scrutiny over what changed, and what did not.
The central point is narrow but important. ₹12 lakh is not the basic exemption limit under the new regime. The basic nil-rate slab remains ₹4 lakh, while the “zero tax” result comes through the rebate under Section 87A for eligible resident individuals whose taxable income does not exceed ₹12 lakh.
The Income Tax Department’s guidance for AY 2026-27 sets nil tax up to ₹4 lakh, 5% from ₹4 lakh to ₹8 lakh, and 10% from ₹8 lakh to ₹12 lakh under the new regime. It also says resident individuals can claim a rebate under Section 87A of up to ₹60,000 where taxable income does not exceed ₹12 lakh.
That means tax is first computed under the slab structure and the rebate is applied after that, if the conditions are met. A resident individual with taxable income of ₹12 lakh under the new regime would have tax of ₹20,000 on income between ₹4 lakh and ₹8 lakh, and ₹40,000 on income between ₹8 lakh and ₹12 lakh, taking total tax before rebate to ₹60,000.
The rebate then wipes out that liability. With a Section 87A rebate of ₹60,000, the final tax payable becomes ₹0. The income remains part of the tax system; the rebate neutralises the tax.
That distinction explains why the phrase “zero tax” has spread faster than the underlying rule. The nil-rate slab did not move to ₹12 lakh. The structure still taxes income in slabs, and the relief arrives at the final stage through the rebate mechanism.
The related claim that salaried individuals may pay no tax up to ₹12.75 lakh rests on a second provision, the standard deduction under Section 16(ia). Under the new regime in Section 115BAC, that deduction rises to ₹75,000, while the old regime continues to allow ₹50,000.
A gross salary of ₹12,75,000 under the new regime can therefore be reduced by the ₹75,000 standard deduction to taxable income of ₹12,00,000. Once taxable income reaches that figure, the same slab calculation applies, producing tax before rebate of ₹60,000, a Section 87A rebate of ₹60,000, and final tax payable of nil.
That is why the ₹12.75 lakh figure is not a separate exemption threshold. It is a salary figure that can fall to ₹12 lakh taxable income after the standard deduction. The relief still depends on the same rebate rule.
Pensioners can also fall within that framework, though only in specific cases. Pension received from a former employer is generally taxed under the head “Salaries,” which means the standard deduction under Section 16(ia) can apply, subject to the regime chosen.
Family pension is treated differently. It is generally taxed under “Income from Other Sources” and follows a different deduction provision, so the ₹50,000 or ₹75,000 standard deduction under Section 16(ia) does not automatically apply to every pension-like receipt.
The regime itself is also changing how taxpayers approach filing. The new regime under Section 115BAC is the default regime, though eligible taxpayers can still opt for the old regime by following the prescribed process.
That process is more restrictive for some filers than for others. Taxpayers with income from business or profession who want to opt out of the default new regime must furnish Form 10-IEA within the prescribed timeline, and the rules for switching back are tighter for that group.
Salaried taxpayers without business income have more flexibility while filing returns, but payroll planning still matters. Employers deduct tax at source through the year, and a mismatch between the chosen regime and the taxpayer’s actual return position can lead to excess deduction or short deduction.
The old regime, meanwhile, remains relevant for taxpayers who use large deductions or exemptions. Those can include HRA, Section 80C investments, medical insurance under Section 80D, home-loan interest, education-loan interest and other eligible deductions.
The difference in rebate is stark. Under the old regime, resident individuals can claim rebate up to ₹12,500 where taxable income does not exceed ₹5 lakh. Under the new regime, the rebate rises to ₹60,000 where taxable income does not exceed ₹12 lakh.
That does not make the new regime automatically better in every case. The outcome depends on salary structure, deductions, exemptions, housing status, investments, pension income, business income and capital gains.
One of the most common mistakes in the current discussion is to treat the ₹12 lakh threshold as universal. It is not. The enhanced Section 87A rebate under the new regime is aimed mainly at normal slab-rate income, and some income taxed at special rates does not receive the same treatment.
That exception matters for taxpayers with market or asset transactions. Short-term capital gains under Section 111A and certain capital gains under Section 112 may not be covered by the rebate, which means a person with salary in the effective “zero tax” range can still owe tax because of capital gains or other special-rate income.
The practical effect reaches beyond equity trades. Mutual fund redemptions, property-sale gains and other income taxed outside normal slabs can alter the final liability even where salary alone appears to fit within the rebate threshold.
Residential status creates another dividing line. The rebate under Section 87A is for resident individuals, so non-resident Indians cannot assume the ₹12 lakh benefit applies simply because Indian-source income falls below that figure.
That makes status determination an early step, not an afterthought. NRIs, returning Indians and globally mobile families must first establish whether they are residents for tax purposes before testing rebate eligibility, return-filing requirements and the treatment of Indian-source income.
Filers also need to separate gross income from taxable income before drawing any conclusion. A salary or pension figure near ₹12.75 lakh can lead to nil tax only if the ₹75,000 standard deduction applies under the new regime and taxable income falls to ₹12 lakh. Without that deduction, the math changes.
The same caution applies to pension receipts. Pension from a former employer may fit the salary framework, but family pension may not, and that difference can decide whether the standard deduction is available at all.
Before filing, taxpayers should verify whether they are resident or non-resident, whether taxable income under the new regime is within ₹12 lakh, whether salary or pension qualifies for standard deduction, and whether any capital gains or other special-rate income is present. They should also compare the new regime with the old one if deductions are substantial.
Documents matter here. Taxpayers should reconcile Form 16, AIS, Form 26AS, bank-interest entries, broker statements and any foreign income or foreign asset reporting obligations before filing a return.
The return form itself may also become an issue in more complex cases. Simpler forms may not be available where taxpayers have short-term capital gains, long-term capital gains under Section 112A beyond specified limits, unlisted equity shares, foreign assets, foreign signing authority or foreign income.
The conversation around ₹12 lakh, then, has two layers. One is a political and public shorthand about “zero tax.” The other is the legal design: a nil-rate slab up to ₹4 lakh, slab taxation above that, and relief delivered through Section 87A if taxable income stays within the limit.
That design also explains why the phrase can mislead as easily as it informs. A taxpayer hearing that income up to ₹12 lakh is tax-free may assume the entire amount falls outside tax. The law does something different. It taxes the income under slabs and then removes the liability through a rebate for eligible resident individuals.
For salaried employees and some pensioners, the added standard deduction sharpens the effect. Gross income of ₹12.75 lakh can still land at nil tax under the new regime because the ₹75,000 deduction reduces taxable income to ₹12 lakh, and the rebate then eliminates the ₹60,000 tax.
That is the arithmetic behind the claim. It is not a new exemption ceiling, it does not erase tax on all forms of income, and it does not apply automatically to NRIs. Taxpayers who stop at the headline number may miss the part that decides the final bill.
