Is a salary of ₹12 Lakhs completely tax-free in FY 2025-26?
If you have been following the news around the Union Budget 2025, you might have heard the headline: "No Tax for Income up to ₹12 Lakhs." But does this apply to everyone? What if your salary is ₹12.5 Lakhs? And does the Old Tax Regime still hold any value for you?
For the Financial Year 2025-26 (Assessment Year 2026-27), the Indian tax landscape has shifted dramatically. The government has aggressively pushed the New Tax Regime by widening the slabs and increasing the Section 87A rebate. However, for a specific group of people—those with high investments, home loans, and HRA—the Old Tax Regime remains a hidden goldmine.
In this comprehensive guide, we will break down the exact tax calculation for a ₹12 Lakh salary, compare both regimes side-by-side, and reveal the mathematical "tipping point" where you should switch from New to Old.
The Big Change: FY 2025-26 New Tax Regime Explained
Before we dive into the calculations, let's look at the revised tax slabs for the New Regime, which is now the default option for all taxpayers.
The New Tax Slabs (FY 2025-26)
The government has reduced the number of slabs and lowered the rates to put more disposable income in your hands.
| Income Slab (₹) | Tax Rate |
|---|---|
| 0 - 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% |
The "Secret" Weapons of the New Regime
Standard Deduction: Increased to ₹75,000 (up from ₹50,000 previously). This is available to all salaried employees and pensioners automatically.
Section 87A Rebate: The maximum rebate has been hiked to ₹60,000.
What this means: If your Net Taxable Income (after Standard Deduction) is ₹12,00,000 or less, your calculated tax (which would be ₹60,000) is fully rebated. You pay ZERO tax.
Scenario 1: Income Tax on ₹12 Lakh Salary (New Regime)
Let's calculate the tax liability for "Ravi," a software engineer with a Gross CTC of ₹12,00,000. Ravi has zero investments and lives with his parents (no rent).
Step 1: Calculate Net Taxable Income
| Gross Salary: | ₹12,00,000 |
| Less: Standard Deduction: | (-) ₹75,000 |
| Net Taxable Income: | ₹11,25,000 |
Step 2: Apply the Tax Slabs
Since his taxable income (₹11.25L) is below the ₹12L threshold for the 87A rebate, we need to see if he qualifies.
| First ₹4L: | Nil |
| Next ₹4L (4L-8L @ 5%): | ₹20,000 |
| Remaining ₹3.25L (8L-11.25L @ 10%): | ₹32,500 |
| Total Tax Calculated: | ₹52,500 |
Step 3: Apply Section 87A Rebate
Since Ravi's taxable income is less than ₹12 Lakhs, he is eligible for the rebate of up to ₹60,000.
| Tax Payable: | ₹52,500 |
| Less: Rebate u/s 87A: | (-) ₹52,500 |
| Final Tax Liability: | ZERO (₹0) |
Verdict: If your salary is ₹12 Lakhs, you pay zero tax under the New Regime in FY 2025-26. You do not need to buy insurance, invest in PPF, or submit rent receipts.
Scenario 2: The Old Tax Regime (Is it Dead?)
Now, let's look at "Arjun," a marketing manager also earning ₹12,00,000. Unlike Ravi, Arjun has significant financial commitments:
- Rent Paid: ₹25,000/month (Lives in Mumbai - Metro).
- EPF + PPF (80C): ₹1,50,000 (Maxed out).
- Health Insurance (80D): ₹25,000.
- NPS (80CCD 1B): ₹50,000.
Should Arjun switch to the New Regime? Or can the Old Regime save him money?
Old Regime Tax Slabs (Unchanged)
| Income Slab | Tax Rate |
|---|---|
| 0 - 2.5L | Nil |
| 2.5L - 5L | 5% |
| 5L - 10L | 20% |
| Above 10L | 30% |
Arjun's Calculation (Old Regime)
| Component | Amount (₹) | Notes |
|---|---|---|
| Gross Salary | 12,00,000 | |
| Less: Standard Deduction | (-) 50,000 | Lower than New Regime |
| Less: HRA Exemption | (-) 2,40,000 | Assuming valid rent receipts |
| Less: Section 80C | (-) 1,50,000 | EPF, LIC, PPF |
| Less: Section 80D | (-) 25,000 | Health Insurance |
| Less: Section 80CCD(1B) | (-) 50,000 | National Pension System |
| Total Deductions | 5,15,000 | |
| Net Taxable Income | 6,85,000 |
Tax Liability for Arjun:
| 0 - 2.5L: | Nil |
| 2.5L - 5L (@ 5%): | ₹12,500 |
| 5L - 6.85L (@ 20%): | ₹37,000 |
| Total Tax: | ₹49,500 |
| Plus 4% Cess: | ₹1,980 |
| Final Tax Payable: | ₹51,480 |
Comparison for Arjun:
- New Regime Tax: ₹0 (Because taxable income after std deduction is < 12L).
- Old Regime Tax: ₹51,480.
Shocking Verdict: Even with massive deductions (Rent, 80C, NPS, Medical), Arjun still loses money in the Old Regime. The New Regime's rebate structure is so powerful that for a ₹12 Lakh salary, it is almost impossible for the Old Regime to win.
The "Tipping Point": When Should You Choose Old Regime?
Does this mean the Old Regime is useless? No.
The Old Regime becomes profitable only if your income is higher (e.g., ₹15 Lakhs+) AND you have massive deductions, particularly Home Loan Interest (Section 24b).
If you have a salary of ₹18 Lakhs and you pay ₹2 Lakhs interest on a Home Loan, plus HRA, plus 80C, the Old Regime can beat the New Regime. But for the specific bracket of ₹12 Lakhs, the New Regime is the undisputed winner for 99% of taxpayers.
Common "Hidden" Deductions People Miss
If you are sticking to the Old Regime (perhaps your salary is higher than ₹12L), ensure you aren't missing these:
- LTA (Leave Travel Allowance): Tax-free for two trips in a block of 4 years.
- Food Coupons: Some companies offer meal vouchers which are tax-exempt.
- Internet/Phone Allowance: Reimbursements for work-related usage are tax-free.
FAQ: Income Tax FY 2025-26
Q1: What is the maximum tax-free income in 2025?
A: Under the New Regime, if your taxable income (after the ₹75k standard deduction) is below ₹12 Lakhs, you pay zero tax. Effectively, a salary of ₹12.75 Lakhs is tax-free for employees.
Q2: Can I switch between regimes?
A: Salaried individuals can switch between Old and New regimes every year based on which is beneficial. Business owners, however, can only switch once.
Q3: Is HRA available in the New Regime?
A: No. House Rent Allowance (HRA) exemption is not available in the New Regime. If you pay high rent, calculate carefully before switching.
Q4: What if my salary is ₹12.5 Lakhs?
A: For ₹12.5 Lakhs gross salary, after ₹75,000 standard deduction, your taxable income is ₹11.75 Lakhs. You still qualify for the full Section 87A rebate and pay zero tax under the New Regime.
Q5: When does the Old Regime become beneficial?
A: The Old Regime typically wins when:
- Your salary is ₹15 Lakhs or higher
- You have a home loan with interest > ₹2 Lakhs (Section 24b)
- You pay high rent (HRA exemption)
- You maximize all deductions (80C, 80D, NPS, etc.)
Q6: What is Section 87A rebate?
A: Section 87A provides a rebate (reduction) in tax liability. For FY 2025-26, if your taxable income is ₹12 Lakhs or less, you get a rebate of up to ₹60,000, effectively making your tax zero.
Calculate Your Exact Liability in Seconds
Manual calculations are prone to error, especially with marginal relief and cess calculations. Every salary structure is unique.
Use our Advanced India Income Tax Calculator (FY 2025-26) to:
- Compare Old vs New Regime side-by-side.
- Factor in Home Loans, HRA, and NPS.
- Get a month-wise TDS breakdown.
- Calculate exact tax savings.
- Plan your investments for maximum tax benefit.
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