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New tax regime, explained

The new tax regime is now the default option for all taxpayers in India, offering lower slab rates in exchange for giving up most exemptions and deductions available under the old regime — no HRA exemption, no Section 80C investments, no home loan interest deduction on a self-occupied property. It suits people who don't have large recurring deductions to claim, or whose deductions don't exceed what the new regime's lower rates already save them.

Why ₹12.75 lakh, not ₹12 lakh, is the real tax-free threshold

Two separate benefits stack for salaried individuals. First, the ₹75,000 standard deduction reduces gross salary to arrive at taxable income — available automatically, no proof or investment required. Second, Section 87A provides a rebate of up to ₹60,000 for anyone with taxable income up to ₹12,00,000, which fully cancels out the tax computed on that income. Combined, a salaried person can earn up to ₹12,75,000 gross and pay zero tax, even though the headline "tax-free limit" often quoted is just ₹12,00,000 — that's the taxable income figure, not the gross income figure.

What happens just above ₹12 lakh — marginal relief

Without a safeguard, earning ₹12,00,001 instead of ₹12,00,000 would create a strange cliff — losing the entire ₹60,000 rebate for one extra rupee of income. Marginal relief prevents this: if your computed tax exceeds the amount your income exceeds ₹12,00,000 by, your tax is capped at that excess amount instead. In practice, this means your tax increases gradually just above the ₹12L mark rather than jumping suddenly to the full slab-computed tax.

What the standard deduction does and doesn't cover

The ₹75,000 standard deduction is available only to salaried employees and pensioners — not to income from business, profession, or most other sources. If your income is entirely from freelance or business activity, your taxable income calculation skips this deduction entirely, which is a common point of confusion for first-time filers with mixed income sources.

Other deductions still allowed under the new regime

The new regime isn't fully deduction-free. Employer contributions to NPS under Section 80CCD(2) remain deductible (up to 14% of salary for government employees, 10% for others), along with a few other specific provisions like transport allowance for differently-abled employees. These are narrow exceptions, not a path back to old-regime-style tax planning.

Common mistakes

• Quoting ₹12 lakh as the tax-free gross income limit. ₹12 lakh is the taxable-income threshold for the 87A rebate — the actual tax-free gross income for salaried individuals is ₹12,75,000 once the standard deduction is applied.
• Assuming the new regime is automatically better. If you have a home loan, pay significant rent, or invest heavily in 80C instruments, running both regimes' numbers before filing is worth the ten minutes it takes.
• Forgetting the rebate doesn't apply to special-rate income. Capital gains and certain other income taxed at special rates don't qualify for the Section 87A rebate, even if your total income is under ₹12 lakh.
• Missing marginal relief just above ₹12 lakh. Some people assume crossing ₹12L means paying full slab-rate tax immediately — marginal relief significantly softens that transition.

Latest update (2026)

Budget 2026 made no changes to the new regime's slab structure or the Section 87A rebate — both are carried forward unchanged from Budget 2025. The main development this year is administrative: the new Income Tax Act, 2025 renames "Previous Year"/"Assessment Year" to a single "Tax Year" and renumbers several sections, without changing the underlying rates or thresholds.