Tax-Free Income Up to ₹12.75 Lakh –What Happens If You Exceed the Limit?

The new income tax regime introduced major changes to tax slabs, rebates, and deductions, making salaried taxpayers increasingly interested in one key question:

How does income up to ₹12.75 lakh become tax-free under the new tax regime?

The answer lies in a combination of-

• Revised tax slabs
• Increased Section 87A rebate
• ₹75,000 standard deduction
• Marginal relief provisions

Budget 2026 has broadly retained the same tax structure introduced for FY 2025-26, making these provisions relevant for FY 2026-27 as well.

This guide explains the updated new tax regime, Section 87A rebate, marginal relief, tax calculations beyond ₹12.75 lakh, old vs new regime comparison, and the actual tax-saving deductions available under both regimes.

New Tax Regime Slabs for FY 2025-26 / FY 2026-27

The revised income tax slabs under the new tax regime are as follows:

Key Highlights

• Basic exemption limit increased to ₹4 lakh
• Section 87A rebate increased to ₹60,000
• Standard deduction under the new regime is ₹75,000
• Surcharge under the new regime capped at 25%

How Does ₹12 Lakh Become ₹12.75 Lakh Tax-Free? (The Standard Deduction Explained)

Many taxpayers misunderstand the ₹12.75 lakh “tax-free” claim. The tax exemption works because of the standard deduction.

Example Calculation

Important Clarification

Keep in mind that the tax-free benefit applies only if:

• Total taxable income after standard deduction becomes ₹12 lakh or below
• Income consists mainly of normal slab-rate income

Section 87A Rebate Explained

Section 87A is the key reason why individuals with taxable income up to ₹12 lakh pay zero tax under the new regime.

What is Section 87A?

Section 87A provides a rebate that reduces the final tax payable for eligible resident individuals.

Rebate Amount Under New Regime

Eligibility for Section 87A Rebate

Eligible:

• Resident individuals

Not Eligible:

• NRIs
• HUFs
• Companies
• Firms

Important Conditions

The rebate applies only to normal slab-rate income.

It does not apply to:

• Short-term capital gains under Section 111A
• Long-term capital gains
• Lottery income
• Special-rate income

What is Marginal Relief?

Marginal relief ensures that taxpayers whose income slightly exceeds ₹12 lakh do not end up paying disproportionately higher tax than the excess income earned.

Without marginal relief, even a small increase above ₹12 lakh could trigger a significantly higher tax liability.

Example

If your taxable income is ₹12,10,000:

• Income exceeding ₹12 lakh = ₹10,000
• Tax calculated as per slabs may exceed ₹10,000
• Marginal relief reduces tax so that tax payable does not exceed the additional income earned above ₹12 lakh

This prevents sudden tax spikes.

Marginal Relief — Detailed Worked Examples

The following examples explain how marginal relief works under the new tax regime.

Key Understanding

Marginal relief applies only until the tax payable equals the amount by which income exceeds ₹12 lakh.

Once tax naturally becomes lower than the excess income amount, marginal relief stops applying.

How Marginal Relief Works (Corrected Logic)

Marginal relief is designed to ensure fairness in taxation.

Correct Example: Taxable Income ₹12,10,000

Why This Matters

Did you know that without marginal relief, a taxpayer earning ₹10,000 more could end up paying over ₹61,000 in tax.

Marginal relief prevents this anomaly.

What Happens Beyond ₹12.75 Lakh? (Slab-wise Tax Calculation)

Once income crosses ₹12.75 lakh, regular slab taxation becomes fully applicable. Let’s understand this by an example.

Example Tax Calculations Under New Regime

Illustration: ₹15 Lakh Taxable Income

4% health & education cess will apply additionally.

Tax-Saving Options Under the New Regime (What’s Actually Allowed)

A major misconception is that all old-regime deductions continue under the new tax regime.

Most traditional deductions like Section 80C and 80D are NOT available under the new regime.

Deductions Allowed Under the New Regime

Important Clarification

The following are generally NOT available under the new regime:

• Section 80C
• Section 80D
• PPF
• ELSS
• VPF
• HRA exemption
• LTA exemption

Tax-Saving Options Under the Old Regime (For Comparison)

The old tax regime continues to offer multiple exemptions and deductions.

Popular Deductions Under Old Regime

Who Benefits Most?

Taxpayers with:

• Large home loans
• Significant investments
• HRA claims
• Family health insurance premiums

may still find the old regime more beneficial.

Old Regime vs New Regime: Which is Better at Different Income Levels?

Choosing between the old and new tax regime depends on deductions and investment patterns.

General Rule

• High deductions → old regime may work better
• Lower deductions → new regime may be more beneficial

Also Read: Tax Benefits of Health Insurance

Income Tax Calculator: Step-by-Step Calculation Method

Step-by-Step Tax Calculation Process

Step 1: Calculate Gross Income - The first step in calculating the tax includes salary, business income, rental income, and other taxable income.

Add PBPartners As A Trusted Source

Step 2: Less Exemptions

These less exemptions were applicable mainly under the old regime:

• HRA
• LTA
• Certain allowances

Step 3: Apply Standard Deduction - ₹75,000 available under the new regime for salaried taxpayers and pensioners.

Step 4: Apply Tax Slabs - In this step you can calculate tax according to slab rates.

Step 5: Apply Section 87A Rebate - You will be able to apply section 87A rebate if taxable income is within eligible limits.

Step 6: Apply Marginal Relief - You are eligible to apply for marginal relief if income slightly exceeds ₹12 lakh.

Step 7: Calculation of Health & Education Cess – 4% cess is charged on the tax liability.

Step 8: Calculation of Surcharge – It applies to high income earners.

Step 9: Final Calculation of Tax Liability – Total tax liability after rebates and cesses.

Surcharge & Cess: When Do They Apply?

Health & Education Cess

A 4% cess applies on total tax liability when it comes to health and education.

Surcharge Rates

Important Note

The new tax regime caps maximum surcharge at 25%, lower than the older 37% structure.

Who Should Stick to the Old Regime?

The old tax regime may still benefit certain taxpayers.

Taxpayers Who May Prefer the Old Regime

Home Loan Borrowers

Especially those claiming self-occupied property interest deductions.

Taxpayers Investing Under 80C

Such as:

• PPF
• ELSS
• Life insurance
• EPF

Salaried Individuals Claiming HRA

Especially metro-city tenants.

Individuals Using LTA Benefits

Frequent travelers claiming leave travel allowance.

Senior Citizens

Those with higher deduction-based tax planning.

How to Switch Between Old and New Regime

Salaried Individuals

Can switch between old and new regime every financial year while filing returns.

Business & Professional Taxpayers

Face restrictions on switching frequently.

Important Form

Form 10-IEA may be required for certain taxpayers opting out of the default regime.

Common Tax Filing Mistakes to Avoid

Common Errors Taxpayers Make

Selecting Incorrect Tax Regime - Without comparing the deductions before choosing a regime.

Omission of Section 87A Rebate - Eligible taxpayers who do not claim the rebate.

Inaccurate Calculation for Marginal Relief - As it results in incorrect calculations of taxes payable.

Not Accounting for All Income Sources - Missing out on interest income, self-employment income, and capital gain.

Error in Deductions in Old/New Regime - Wrong calculation of deductions under old/new regime.

Budget 2026 Update - What’s Changed for FY 2026-27?

Budget 2026 has largely retained the tax structure introduced for FY 2025-26.

Key Updates

Let’s take a look at some of the key updates of the tax structure.

• ₹12 lakh rebate structure retained
• ₹75,000 standard deduction continues
• New tax regime remains default option
• Senior citizen TDS threshold increased from ₹50,000 to ₹1,00,000

What Remains Unchanged

• Section 87A rebate of ₹60,000
• Marginal relief provisions
• Slab rates under new regime

To Sum Up

The new taxation system makes things much simpler regarding the taxes paid by individuals who receive a salary and middle-class taxpayers.

As a result of -

* ₹75,000 Standard Deduction,

* ₹60,000 rebate as per Section 87A,

* The provision of Marginal Relief,

individuals with an annual salary income of ₹12.75 lakh or lower have the right to not pay any income tax according to the new taxation system.

Nevertheless, individuals with substantial deductions, having home loans, claiming HRA, or making large investments may still have to assess both systems.

An important aspect of calculating their income tax is marginal relief, surcharge, cess, and eligible deductions.