Under the new tax regime for FY 2026-27 (AY 2027-28), income up to Rs 12 lakh is genuinely tax-free. This is not a reduction in tax rates — it is a full rebate under Section 87A of the Income Tax Act that wipes out the computed tax entirely. For salaried employees, the standard deduction of Rs 75,000 extends this zero-tax threshold to Rs 12.75 lakh of gross salary. This guide explains the exact calculation, the critical cliff at Rs 12.1 lakh, and what changes when income crosses Rs 12 lakh.
Quick Answer
Quick AnswerIs income tax zero on Rs 12 lakh salary under the new regime in FY 2026-27? Yes. Under the new tax regime in FY 2026-27, a taxable income of up to Rs 12 lakh is completely tax-free because of the Section 87A rebate (increased to Rs 60,000 in Union Budget 2025). The computed tax on Rs 12 lakh is Rs 60,000, which is fully wiped out by the rebate. Net tax payable = Rs 0.
Formula
Tax on Rs 12L: 0–4L = 0 | 4–8L = 5% = Rs 20,000 | 8–12L = 10% = Rs 40,000 | Total = Rs 60,000. Less: Section 87A rebate = Rs 60,000. Tax payable = Rs 0.
Source: Section 87A of the Income Tax Act, as amended by Finance Act 2025. Verify at incometax.gov.in.
Answer Engine Summary
Income of Rs 12 lakh or less is completely tax-free under the new regime in FY 2026-27 due to the Section 87A rebate of up to Rs 60,000. For salaried employees, zero tax applies up to Rs 12.75 lakh gross salary (after Rs 75,000 standard deduction). A single rupee above Rs 12 lakh makes the full computed tax payable — this is the tax cliff to watch.
Last updated: 13 July 2026
Educational information only. Verify applicability with official guidance and qualified professionals where needed.
New tax regime slabs for FY 2026-27 (AY 2027-28)
The Finance Act 2025 revised the new tax regime slabs effective from FY 2025-26 (continuing in FY 2026-27). The slab structure is: Taxable income 0–4 lakh: 0% tax. Rs 4–8 lakh: 5% (tax = Rs 20,000). Rs 8–12 lakh: 10% (tax = Rs 40,000). Rs 12–16 lakh: 15%. Rs 16–20 lakh: 20%. Rs 20–24 lakh: 25%. Above Rs 24 lakh: 30%.
Salaried employees also get a standard deduction of Rs 75,000 under the new regime (raised from Rs 50,000 in Budget 2024). So a gross salary of Rs 12.75 lakh gives a taxable income of exactly Rs 12 lakh — right at the zero-tax line.
- Standard deduction (new regime): Rs 75,000
- Zero tax threshold: taxable income up to Rs 12 lakh
- For salaried: zero tax on gross salary up to Rs 12.75 lakh
- Section 87A rebate amount: Rs 60,000
- Rebate available only if total income does not exceed Rs 12 lakh
Zero Tax on Rs 12L: How the 87A Rebate Works
New regime slab breakdown and rebate for Rs 12 lakh income
Exact tax calculation at Rs 12 lakh income
Taxable income: Rs 12,00,000. Step-by-step calculation: First Rs 4 lakh: 0% = Rs 0. Next Rs 4 lakh (Rs 4L–8L): 5% = Rs 20,000. Next Rs 4 lakh (Rs 8L–12L): 10% = Rs 40,000. Total computed tax: Rs 60,000.
Section 87A rebate: Income Tax Act Section 87A, as amended by Finance Act 2025, provides a rebate of up to Rs 60,000 for individuals whose taxable income does not exceed Rs 12 lakh. Since computed tax (Rs 60,000) ≤ maximum rebate (Rs 60,000), the rebate is applied in full.
Tax payable after rebate: Rs 60,000 − Rs 60,000 = Rs 0. Health and Education Cess (4%): Rs 0. Final tax liability: Rs 0.
Practical Example: Tax at exactly Rs 12 lakh — complete working
Gross salary: Rs 12,75,000 | Standard deduction: Rs 75,000 | Taxable income: Rs 12,00,000 | Computed tax: Rs 60,000 | 87A rebate: Rs 60,000 | Cess (4%): Rs 0 | Final tax: Rs 0.
The Rs 12.1 lakh cliff: what happens when income crosses Rs 12 lakh
This is the most important aspect of the new regime rebate that most people misunderstand. The Section 87A rebate is an all-or-nothing mechanism — it is available only when taxable income is Rs 12 lakh or below. If your income is Rs 12,00,001 — even a single rupee more — the entire rebate of Rs 60,000 is withdrawn.
Taxable income Rs 12,10,000 (Rs 10,000 above the limit): Rs 4–8L = 5% = Rs 20,000; Rs 8–12L = 10% = Rs 40,000; Rs 12–12.1L = 15% = Rs 1,500. Total tax = Rs 61,500. No Section 87A rebate (income exceeds Rs 12L). Add 4% cess: Rs 61,500 × 1.04 = Rs 63,960. For earning Rs 10,000 more, you pay Rs 63,960 extra in tax.
This is the "cliff effect" and it is real. If your taxable income is likely to be Rs 12.1–12.5 lakh, you are in the worst possible zone — earning slightly more than Rs 12 lakh means your take-home may actually be lower than if you had earned exactly Rs 12 lakh.
Practical Example: Rs 12.1 lakh vs Rs 12 lakh — the Rs 63,960 tax cliff
At Rs 12L taxable income: Tax = Rs 0. At Rs 12.1L taxable income: Tax = Rs 63,960. Extra earning: Rs 10,000. Extra tax: Rs 63,960. Net loss from earning more: Rs 53,960. Lesson: If your taxable income is Rs 12–12.6L, consider maximising NPS 80CCD(1B) or other new regime-allowed deductions to bring it back to Rs 12L.
New regime vs old regime at Rs 12 lakh salary
At Rs 12 lakh taxable income, the new regime is unambiguously better — the tax is Rs 0 vs potentially Rs 52,500 in the old regime (before any deductions). Even with maximum old regime deductions of Rs 3.5 lakh (HRA Rs 1.5L + 80C Rs 1.5L + 80D Rs 50K), the old regime tax on Rs 8.5 lakh taxable income would be approximately Rs 85,500 → still much higher than zero.
However, if your gross salary is above Rs 12.75 lakh (making taxable income above Rs 12 lakh under the new regime), the comparison changes and depends on your actual deductions. Use the RupeeKit Income Tax Calculator (Old vs New Regime) to compare your specific situation.
How to keep income within Rs 12 lakh to avoid tax
Under the new tax regime, very few deductions are allowed — but Section 80CCD(1B) still works. You can contribute up to Rs 50,000 extra to NPS voluntarily and deduct it. Stack that with the Rs 75,000 standard deduction and a salaried employee earning Rs 13.25 lakh gross can reach exactly Rs 12 lakh taxable income: Rs 13.25L − Rs 75K (standard) − Rs 50K (NPS 80CCD(1B)) = Rs 12.00L — zero tax.
Employer contribution to NPS is fully exempt under Section 80CCD(2) without any Rs 50,000 cap. Many employers who offer structured salary now route a portion of CTC as employer NPS to help employees stay below the Rs 12 lakh threshold.
Verify all deduction details at the official Income Tax Department website (incometax.gov.in) or use the e-Filing portal (eportal.incometax.gov.in) for AY 2027-28 ITR-related information.
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Frequently Asked Questions
Is Rs 12 lakh salary completely tax-free in FY 2026-27?
Yes, under the new tax regime. If your taxable income does not exceed Rs 12 lakh, the Section 87A rebate of Rs 60,000 fully offsets the computed tax. The condition is that income must not exceed Rs 12 lakh — even Rs 1 above removes the rebate entirely.
What is the Section 87A rebate for FY 2026-27?
Section 87A provides a tax rebate of up to Rs 60,000 for individuals (resident) whose total income does not exceed Rs 12 lakh in FY 2026-27, under the new tax regime. This was increased from Rs 25,000 (Rs 7 lakh threshold) to Rs 60,000 (Rs 12 lakh threshold) in Union Budget 2025. The official source is Section 87A of the Income Tax Act, 1961.
What if I earn Rs 12,50,000 — how much tax do I pay under new regime?
At Rs 12.5 lakh taxable income, there is no Section 87A rebate. Tax: 4–8L = Rs 20,000; 8–12L = Rs 40,000; 12–12.5L (15%) = Rs 7,500. Total = Rs 67,500. Add 4% cess = Rs 70,200. So income of Rs 12.5L costs Rs 70,200 in tax while income of Rs 12L costs Rs 0.
Is the Rs 12 lakh threshold applicable to old regime also?
No. Section 87A in the old regime provides a rebate of up to Rs 12,500 for income up to Rs 5 lakh only. The Rs 60,000 rebate for income up to Rs 12 lakh is exclusively available under the new tax regime for FY 2026-27.
Does capital gains income count toward the Rs 12 lakh threshold?
This is a nuanced point. Long-term and short-term capital gains (LTCG/STCG) are included in total income for checking the Rs 12 lakh threshold. However, the rebate is calculated differently — special-rate capital gains are excluded from the rebate computation. As per IT rules, 87A rebate cannot be applied to offset the tax on LTCG on equity (taxed at 12.5%) or STCG on equity (20%). This is a complex area — verify at incometax.gov.in or consult a CA for your specific situation.
Educational Disclaimer
The content on this page is provided for general informational and educational purposes only. It does not constitute financial, tax, legal, or investment advice. Individual situations vary; always consult with a certified tax expert or financial advisor before making major financial decisions.