Since the Finance Act 2025, salaried employees across India have been asking the same thing in office lunchrooms: is income up to ₹12 lakh really tax-free? Under the new tax regime slabs, mostly yes, thanks to the section 87A rebate. But the details (standard deduction, marginal relief, cess) decide what actually leaves the bank account. This guide works through them with real numbers.
New tax regime slabs (Finance Act 2025)
| Taxable income | Rate |
|---|---|
| Up to ₹4,00,000 | Nil |
| ₹4,00,001 – ₹8,00,000 | 5% |
| ₹8,00,001 – ₹12,00,000 | 10% |
| ₹12,00,001 – ₹16,00,000 | 15% |
| ₹16,00,001 – ₹20,00,000 | 20% |
| ₹20,00,001 – ₹24,00,000 | 25% |
| Above ₹24,00,000 | 30% |
Each rate applies only to the part of income inside its band. Someone with ₹10 lakh of taxable income does not pay 10% on all of it, only on the slice between ₹8 and ₹10 lakh.
Why ₹12.75 lakh salary pays no tax
- Salaried employees and pensioners get a ₹75,000 standard deduction in the new regime: ₹12,75,000 − ₹75,000 = ₹12,00,000 taxable.
- Slab tax on ₹12 lakh = ₹20,000 (5% of ₹4 lakh) + ₹40,000 (10% of ₹4 lakh) = ₹60,000.
- The section 87A rebate cancels tax of up to ₹60,000 when taxable income does not exceed ₹12 lakh. Tax payable: nil.
Does the ₹12 lakh rebate apply to capital gains?
Income taxed at special rates, such as many capital gains, is treated separately, and the rebate does not simply wipe that tax out. People with such income should check their case on the Income Tax e-filing portal or with a tax professional.
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Marginal relief: what happens just above ₹12 lakh
Without relief, earning one rupee over ₹12 lakh would suddenly create ₹60,000 of tax. The law prevents that: just above the limit, tax cannot exceed the income above ₹12 lakh.
Example: salary ₹13,00,000 → taxable ₹12,25,000. Normal slab tax would be ₹63,750, but the income above ₹12 lakh is only ₹25,000, so tax is limited to ₹25,000, plus 4% cess = ₹26,000.
Relief stops mattering once normal slab tax becomes smaller than the excess income, which happens at about ₹12.71 lakh taxable (roughly ₹13.46 lakh salary).
Four worked examples (salaried, new regime)
| Annual salary | Taxable | Slab tax | After rebate/relief | With 4% cess |
|---|---|---|---|---|
| ₹10,00,000 | ₹9,25,000 | ₹32,500 | ₹0 | ₹0 |
| ₹13,00,000 | ₹12,25,000 | ₹63,750 | ₹25,000 | ₹26,000 |
| ₹15,00,000 | ₹14,25,000 | ₹93,750 | ₹93,750 | ₹97,500 |
| ₹20,00,000 | ₹19,25,000 | ₹1,85,000 | ₹1,85,000 | ₹1,92,400 |
On a ₹15 lakh salary the effective rate is about 6.5%, even though the top slab touched is 15%. That gap between the marginal and average rate surprises many first-time filers.
What the new regime does not allow
- Most deductions: 80C (PF, PPF, ELSS, LIC premium), 80D (health insurance), HRA and home-loan interest on a self-occupied house are not available.
- What remains: the standard deduction, the employer's NPS contribution under 80CCD(2), and a few others listed in the Act.
That is why the old regime can still win for someone with a large home loan, full 80C, health insurance and HRA. The only reliable way to know is to calculate both.
Common mistakes
- Forgetting the standard deduction and concluding that ₹12.5 lakh salary is taxable.
- Applying the top rate to the whole income instead of slab by slab.
- Ignoring cess: 4% is added to tax (and surcharge, at high incomes).
- Assuming the employer's TDS choice is final. Salaried employees can generally choose the regime while filing the return each year.
The free income tax calculator shows both regimes side by side, with the standard deduction, rebate, marginal relief and cess worked step by step, and the monthly in-hand figure.
Frequently asked questions
What are the new tax regime slabs?
Nil up to ₹4 lakh, 5% to ₹8 lakh, 10% to ₹12 lakh, 15% to ₹16 lakh, 20% to ₹20 lakh, 25% to ₹24 lakh and 30% above, under the Finance Act 2025.
Is ₹12 lakh income tax-free in the new regime?
Yes, taxable income up to ₹12 lakh pays no tax because of the 87A rebate. For salaried people that means a salary up to ₹12.75 lakh.
What is marginal relief?
Just above ₹12 lakh taxable income, tax is capped at the amount by which income exceeds ₹12 lakh, so nobody pays more tax than the extra income.
How much tax is payable on a ₹15 lakh salary?
About ₹97,500 including 4% cess under the new regime.
Can I claim 80C in the new regime?
No. 80C and most other deductions are not available; the old regime still allows them.
Keep reading
- Income Tax Calculator: the free tool this guide explains.
- All finance calculators
Sources: Finance Act 2025 (new-regime slabs, ₹75,000 standard deduction, section 87A rebate up to ₹12 lakh); 4% health and education cess.