The Three Levers That Make ₹12.75 Lakh Tax-Free in the New Regime

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"Income up to ₹12 lakh is tax-free" is the headline of the new regime for FY 2025-26 — but it is the result of three separate provisions working together, not a single higher slab. Understanding the standard deduction, the Section 87A rebate and marginal relief explains both why the figure is really about ₹12.75 lakh for salaried people, and why someone at ₹12.1 lakh pays almost nothing.

Lever 1: the ₹75,000 standard deduction

Every salaried taxpayer (and pensioner) gets a flat standard deduction of ₹75,000 under the new regime, with no bills or proofs required. It comes straight off your salary before tax is calculated. This is why the tax-free ceiling differs by income type: the ₹12 lakh threshold is on total income, but a salaried person first knocks off ₹75,000, so a salary of about ₹12.75 lakh becomes ₹12 lakh of total income.

Lever 2: the Section 87A rebate

Once total income is at or below ₹12 lakh, the Section 87A rebate (up to ₹60,000 under the new regime for FY 2025-26) wipes out the tax that the slabs would otherwise charge. Work it through for exactly ₹12 lakh of total income:

The rebate is exactly sized to cancel the ₹60,000 of slab tax at ₹12 lakh. Note the rebate is only for resident individuals and only on normal slab income — special-rate capital gains are excluded.

Lever 3: marginal relief just above ₹12 lakh

Here is the problem the third lever solves. The moment total income crosses ₹12 lakh, the 87A rebate disappears — so on paper, going from ₹12,00,000 to ₹12,10,000 would jump your tax from ₹0 to roughly ₹61,500. You would keep ₹10,000 more of income but lose far more to tax. That is absurd, so the law adds marginal relief: your tax on income just above ₹12 lakh is capped so that it cannot exceed the amount of income above ₹12 lakh.

So at ₹12,10,000 total income, the extra tax is limited to about ₹10,000 (the excess over ₹12 lakh), not ₹61,500. Marginal relief phases out gradually as income rises further, until at some point the normal tax is lower than the capped figure and relief no longer applies.

Putting the three together

For a salaried taxpayer, the sequence is:

1. Start with gross salary.
2. Subtract the ₹75,000 standard deduction → total income.
3. If total income ≤ ₹12 lakh, the 87A rebate makes tax nil.
4. If total income is a little over ₹12 lakh, marginal relief keeps the extra tax small.
5. Add 4% cess on any remaining tax.

That is how "₹12 lakh tax-free" becomes roughly "₹12.75 lakh salary tax-free", with a soft landing just above it.

The important exception: capital gains

None of this shelters special-rate income. Capital gains taxed under Sections 111A (20%) or 112A (12.5%) are computed separately and do not qualify for the 87A rebate. So a person with ₹11 lakh salary and ₹3 lakh of equity LTCG still pays tax on the gains even though the salary alone would be rebate-covered. See the capital gains guide for how these interact.

See it on your own numbers

The ITR calculator applies all three levers — standard deduction, 87A rebate and marginal relief — automatically, and shows the old regime alongside for comparison. For the full slab table and surcharge detail, read the FY 2025-26 slab guide.