EaseValueWhat Happened?
The Income Tax Act 2025 has made significant changes to how salaried taxpayers are taxed under the New Tax Regime. Starting from Assessment Year (AY) 2026-27, salaried employees and pensioners can now earn up to ₹12.75 lakh annually and pay zero income tax. This benefit combines two key provisions: the ₹75,000 standard deduction and the Section 87A rebate, both of which substantially reduce tax liability for eligible taxpayers.
Background & Legal Context
To understand this benefit, you need to know the legal foundation:
1. Standard Deduction Under Income Tax Act 2025
The Income Tax Act 2025 introduced a standard deduction of ₹75,000 for salaried employees and pensioners under the New Tax Regime. This is a fixed deduction that reduces your gross salary income automatically. Previously, under the Old Tax Regime (Income Tax Act 1961), only certain allowances and deductions were permitted. The New Tax Regime simplifies this by offering a flat ₹75,000 deduction regardless of which allowances you receive.
- Applicable to: Salaried employees, pensioners, and those earning income from pensions
- Amount: ₹75,000 per financial year
- Effective from: AY 2026-27 (FY 2025-26)
- No conditions: You don't need to claim any specific allowances
2. Section 87A Rebate – The Game Changer
Section 87A of Income Tax Act 2025 provides a rebate (not a deduction) on the tax amount itself. This is crucial because a rebate reduces your actual tax payable, whereas a deduction reduces your taxable income.
For AY 2026-27, Section 87A rebate is available for:
- Individual taxpayers (residents of India)
- Income up to ₹12,75,000 under the New Tax Regime
- Rebate amount: Full tax relief up to the specified income limit
3. How They Work Together
The combination creates a powerful nil-tax bracket:
- Step 1: Your salary income is reduced by ₹75,000 (standard deduction)
- Step 2: Tax is calculated on the remaining income using the New Tax Regime slab rates
- Step 3: Section 87A rebate is applied, which wipes out the tax liability for income up to ₹12.75 lakh
What Does This Mean for You?
Scenario 1: Salary of ₹10 Lakh
Salaried Employee ABC – AY 2026-27
- Gross Salary: ₹10,00,000
- Less: Standard Deduction u/s Income Tax Act 2025: -₹75,000
- Taxable Income: ₹9,25,000
- Tax under New Regime: ₹0 (falls within Section 87A rebate limit of ₹12.75 lakh)
- Final Tax Payable: ₹0
Scenario 2: Salary of ₹12.75 Lakh
Salaried Employee XYZ – AY 2026-27
- Gross Salary: ₹12,75,000
- Less: Standard Deduction: -₹75,000
- Taxable Income: ₹12,00,000
- Tax under New Regime slab rates: Calculated but fully covered by Section 87A rebate
- Final Tax Payable: ₹0
Scenario 3: Salary of ₹15 Lakh (What Happens Above the Limit?)
Salaried Employee PQR – AY 2026-27
- Gross Salary: ₹15,00,000
- Less: Standard Deduction: -₹75,000
- Taxable Income: ₹14,25,000
- Tax under New Regime: Calculated on full amount (Section 87A rebate doesn't apply beyond ₹12.75 lakh)
- Final Tax Payable: Regular tax as per slab rates
Who Benefits Most?
- Salaried employees earning ₹12.75 lakh or less
- Pensioners receiving pension and other income up to this limit
- Those who have already opted for New Tax Regime
- Employees who did not claim deductions under Old Tax Regime
Who Does NOT Benefit?
- Self-employed professionals and business owners (different tax rules apply)
- Those earning income from capital gains, rental income, etc. (unless covered under special provisions)
- Non-residents (Section 87A applies only to residents)
- Taxpayers who prefer Old Tax Regime (Income Tax Act 1961 rules still available)
What Should You Do Now?
Action Item 1: Check Your Income Level
Calculate your expected gross salary for FY 2025-26 (AY 2026-27). If it's ₹12.75 lakh or below, you can plan for nil tax filing.
Action Item 2: Verify Your Tax Regime Choice
Confirm whether you are already under the New Tax Regime or still filing under the Old Tax Regime. This benefit ONLY applies to New Tax Regime filers. You can switch regimes during filing if you haven't locked in the choice.
Action Item 3: Organize Salary Slips
Keep all 12 salary slips for FY 2025-26. They will show your gross salary, TDS deducted, and other details needed for accurate ITR filing.
Action Item 4: Plan for ITR Filing
Even though your tax is nil, you may still need to file an ITR if you have:
- Any TDS deducted on salary or other income
- Income from other sources (interest, rental, etc.)
- Any refund due from previous years
Action Item 5: File ITR-1 (Sahaj)
Most salaried employees can use ITR-1 (Sahaj), which is the simplest return form. Filing is free on the Income Tax Department portal (www.incometax.gov.in).
Action Item 6: Track Changes in Rules
The Income Tax Act 2025 is new, and the Department may issue clarifications via circulars. Stay updated on any changes to the standard deduction or Section 87A rebate limits.
Key Takeaways
- Nil Tax Benefit: Salaried employees earning up to ₹12.75 lakh pay zero income tax under New Tax Regime in AY 2026-27.
- Two Components: ₹75,000 standard deduction + Section 87A rebate work together to eliminate tax liability.
- New Tax Regime Only: This benefit is NOT available under Old Tax Regime (Income Tax Act 1961). New Regime is mandatory to claim this benefit.
- ITR Still Required: Even with nil tax, you may need to file ITR if TDS is deducted or you have other income sources.
- Residents Only: Non-residents and foreign nationals are not eligible for Section 87A rebate benefits.
Bottom Line: If you are a salaried employee earning up to ₹12.75 lakh and are under the New Tax Regime, congratulations—you owe zero income tax for AY 2026-27. However, ensure you file your ITR on time to avoid penalties and keep your tax compliance record clean.
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