Earning Above ₹12.75 Lakh? You May Still Qualify For Income Tax Relief Under New Rules

The announcement of zero income tax on annual income up to ₹12 lakh under the new tax regime became one of the most talked-about highlights of Budget 2025. For salaried individuals and middle-class taxpayers, the move signalled major financial relief. However, a closer look at the structure of the tax rules reveals that the benefit is not entirely due to tax-free slabs, but because of a rebate mechanism under Section 87A.

This distinction becomes important when a taxpayer’s income marginally exceeds the ₹12 lakh limit. In such cases, the tax calculation changes significantly, making marginal relief a key concept for understanding the final tax liability.

How The New Tax Slabs Actually Work

Under the revised tax regime for the financial year 2025-26, income up to ₹4 lakh remains tax-free. Income between ₹4 lakh and ₹8 lakh is taxed at 5%, while earnings between ₹8 lakh and ₹12 lakh attract 10% tax.

Beyond ₹12 lakh, the tax rate rises to 15% for income up to ₹16 lakh. Higher slabs continue at increasing rates, eventually reaching 30% for income above ₹24 lakh.

This means income beyond ₹4 lakh is technically taxable under the slab structure. However, taxpayers earning up to ₹12 lakh receive a rebate under Section 87A, which reduces their final tax liability to zero.

Why The ₹12 Lakh Tax-Free Claim Needs Context

The government increased the rebate limit significantly in Budget 2025. Earlier, taxpayers earning up to ₹7 lakh benefited from this provision, but the revised framework extended the rebate eligibility to ₹12 lakh.

The rebate amount has also been increased to ₹60,000. This effectively cancels out the tax payable on income up to ₹12 lakh under the new regime.

For example, the slab-wise tax on ₹12 lakh income works out to ₹60,000. Since the rebate available is also ₹60,000, the final tax payable becomes zero.

However, the rebate applies only until the income remains within the prescribed threshold. Once the taxable income crosses ₹12 lakh, even by a small amount, the rebate benefit begins to phase out.

Role Of Standard Deduction In Tax Savings

The government has also continued the standard deduction benefit under the new tax regime. Salaried individuals can claim a standard deduction of ₹75,000 from their gross income before tax calculations begin.

As a result, a person with a total salary of ₹12.75 lakh may still fall within the effective zero-tax zone after deduction adjustments. This has become an important relief measure for salaried employees.

The standard deduction reduces taxable income and allows more taxpayers to remain eligible for the rebate.

What Happens When Income Exceeds ₹12 Lakh

The situation changes once taxable income after deductions exceeds ₹12 lakh. Even a small increase can lead to a noticeable jump in tax liability because the rebate benefit no longer applies fully.

For instance, if taxable income reaches ₹12.10 lakh, tax is calculated according to the slab system. The total liability can rise sharply despite the income increasing only marginally.

This sudden rise created concerns among taxpayers, especially those receiving annual increments or bonuses that push their income slightly above the rebate limit.

Understanding Marginal Relief

To address this issue, the government introduced marginal relief under the new tax regime. The purpose of this relief is to ensure that additional tax payable does not exceed the extra income earned beyond the threshold.

In simple terms, if a taxpayer earns ₹10,000 above the rebate limit, the extra tax burden should not be higher than that additional income itself.

This provision protects taxpayers from facing an excessively high tax bill merely because their earnings crossed the limit by a small margin.

Marginal relief gradually reduces as income rises further and generally stops applying once taxable income moves beyond approximately ₹12.75 lakh after deductions. Beyond that level, the regular slab-based tax system applies fully.

Why Taxpayers Should Plan Carefully

The revised tax framework highlights the importance of salary structuring and tax planning under the new regime. Employees expecting bonuses, incentives or variable pay may need to evaluate how close their taxable income is to the rebate threshold.

Understanding the interaction between rebate provisions, standard deduction and marginal relief can help taxpayers avoid unexpected tax liabilities and make better financial decisions during the financial year.