TaxSmart India
Updated April 2026
8 min read
FY 2025-26 (AY 2026-27)
You entered your salary into a tax calculator and it showed ₹0. Your first instinct was probably — is this real? Did something break? It's real. It's legal. And the government put it there on purpose. Here's the exact math.
The short answer
Section 87A of the Income Tax Act gives every resident individual with taxable income up to ₹12 lakh a full tax rebate under the New Tax Regime in FY 2025-26. The rebate is up to ₹60,000 — which is more than the slab tax at ₹12L — so it cancels your tax entirely.
Bottom line
If your gross salary is ₹12.75 lakh or below and you are under New Tax Regime — your income tax is legally ₹0. No trick. No loophole. This is exactly what Budget 2025 intended.
The step-by-step calculation
Let's use a real example: gross salary of ₹12 lakh.
1
Start with gross salary
Your total annual salary before any deductions.
₹12,00,000
2
Subtract standard deduction
Under New Regime, every salaried employee gets ₹75,000 standard deduction automatically. No investment needed.
₹12,00,000 − ₹75,000 = ₹11,25,000 taxable income
3
Apply New Regime slab tax
The tax slabs are applied to ₹11,25,000 taxable income.
Slab tax = ₹52,500 (calculated below)
4
Apply Section 87A rebate — this is where ₹0 happens
Since taxable income (₹11,25,000) is below ₹12L, the full slab tax is cancelled by the rebate. Maximum rebate is ₹60,000 — slab tax is only ₹52,500, so the entire amount is wiped out.
₹52,500 − ₹52,500 rebate = ₹0 tax
5
Add 4% Health & Education Cess
Cess is calculated on tax payable — which is now ₹0. So cess is also ₹0.
4% × ₹0 = ₹0
| Step | Amount |
|---|
| Gross Salary | ₹12,00,000 |
| Less: Standard Deduction (New Regime) | − ₹75,000 |
| Taxable Income | ₹11,25,000 |
| Slab Tax on ₹11,25,000 (calculated below) | ₹52,500 |
| Less: Rebate u/s 87A (income ≤ ₹12L) | − ₹52,500 |
| Tax after rebate | ₹0 |
| 4% Health & Education Cess on ₹0 | ₹0 |
| Total Tax Payable | ₹0 |
How the slab tax of ₹52,500 is calculated
Many people assume "if tax is ₹0, slabs don't matter." That's wrong — slabs are always calculated first. The rebate comes after. Here's the slab breakdown for ₹11,25,000 taxable income:
| Income Slab | Rate | Tax |
|---|
| ₹0 to ₹4,00,000 | 0% | ₹0 |
| ₹4,00,001 to ₹8,00,000 | 5% | ₹20,000 |
| ₹8,00,001 to ₹11,25,000 | 10% | ₹32,500 |
| Total Slab Tax (before rebate) | | ₹52,500 |
Why you need to understand this
The slab tax is real. ₹52,500 is what you would owe without the rebate. Section 87A cancels it completely. This is why our calculator shows both numbers — the slab tax and the rebate — so you understand exactly what happened. Most calculators just show ₹0 and leave you confused.
What is the actual salary limit for zero tax?
The rebate applies when taxable income is up to ₹12L. For salaried individuals, taxable income = gross salary minus standard deduction. So:
| Gross Salary | Standard Deduction | Taxable Income | Tax Result |
|---|
| ₹12,75,000 | ₹75,000 | ₹12,00,000 | ₹0 — Zero Tax |
| ₹12,00,000 | ₹75,000 | ₹11,25,000 | ₹0 — Zero Tax |
| ₹10,00,000 | ₹75,000 | ₹9,25,000 | ₹0 — Zero Tax |
| ₹13,00,000 | ₹75,000 | ₹12,25,000 | ₹26,000 (marginal relief) |
| ₹15,00,000 | ₹75,000 | ₹14,25,000 | ₹97,500 |
| ₹20,00,000 | ₹75,000 | ₹19,25,000 | ₹1,92,400 |
The exact cutoff for salaried employees is ₹12,75,000 gross salary. One rupee above this and taxable income crosses ₹12L — but marginal relief ensures the tax jump is not sudden.
What is marginal relief — and do you get it?
If your gross salary is between ₹12.75L and ₹13.5L (roughly), your taxable income falls between ₹12L and ₹12.75L. Without protection, earning ₹1 above ₹12L would cost you ₹61,500 in tax — more than the extra income itself. That's clearly unfair.
The government introduced marginal relief to prevent this. The rule: your tax cannot exceed the income you earned above ₹12L.
Example: Gross salary ₹13 lakh
Taxable income: ₹12,25,000 (after ₹75K standard deduction)
Slab tax: ₹63,750
Income above ₹12L: ₹25,000
Without marginal relief: would pay ₹63,750 — more than the ₹25,000 extra earned
With marginal relief: tax capped at ₹25,000 + 4% cess = ₹26,000
Is this only for New Tax Regime?
Yes. The ₹0 tax on income up to ₹12.75L is exclusive to the New Tax Regime. Under the Old Tax Regime, Section 87A gives a much smaller rebate — ₹12,500 — applicable only if taxable income is below ₹5L.
| Detail | New Regime | Old Regime |
|---|
| 87A Rebate limit | ₹60,000 | ₹12,500 |
| Income limit for rebate | ₹12,00,000 taxable | ₹5,00,000 taxable |
| Effective zero-tax salary | Up to ₹12,75,000 | Up to ₹5,50,000 |
| Standard deduction | ₹75,000 | ₹50,000 |
| 80C, 80D, HRA deductions | Not allowed | Allowed |
Do I still need to file ITR if tax is ₹0?
Important — don't skip this
Yes. Filing ITR is mandatory if your gross income exceeds ₹3 lakh (New Regime) or ₹2.5 lakh (Old Regime) — regardless of whether final tax is ₹0 after the rebate. Zero tax does not mean zero filing obligation. The deadline for FY 2025-26 is 31 July 2026. Late filing attracts ₹5,000 penalty under Section 234F.
The 3 most common questions after seeing ₹0
1. "My HR deducted TDS from my salary — how is my tax ₹0?"
Your HR deducted TDS based on projected income at the start of the year — possibly before the Budget 2025 changes were fully incorporated, or without accounting for the rebate correctly. The actual tax liability is ₹0. You are entitled to a full refund of all TDS deducted. File your ITR and claim it — the refund comes directly to your bank account.
2. "Should I still invest in 80C if my tax is already ₹0?"
Under New Regime, 80C deductions are not allowed anyway. But more importantly — if your tax is already ₹0, forcing money into 80C investments (PPF, ELSS, LIC) gives you zero additional tax benefit. That money is better deployed in flexible investments that suit your goals. This is the core reason most salaried employees below ₹12.75L are better off in New Regime.
3. "What if I switch to Old Regime — will I pay more?"
Almost certainly yes, unless you have very large deductions. For a ₹12L salary with standard deductions only, Old Regime tax is ₹1,63,800. New Regime tax is ₹0. The difference is ₹1,63,800 per year — ₹13,650 every single month. Use our calculator below to check your specific numbers.
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Frequently asked questions
Is the Section 87A rebate automatic or do I need to claim it?
It is automatic when you file ITR. The Income Tax portal applies it based on your income. You do not need to separately claim or declare it — it is calculated based on your total taxable income and the regime you choose.
Can NRIs claim the Section 87A rebate?
No. Section 87A is available only to resident individuals in India. Non-resident Indians (NRIs) are not eligible for this rebate, even if their income in India is below ₹12 lakh.
Does the rebate apply to capital gains income?
No. Section 87A rebate does not apply to income taxed at special rates — including short-term capital gains under Section 111A (20%) and long-term capital gains under Section 112A (12.5%). If you have capital gains, those are taxed separately even if your salary-related tax is ₹0.
What is the difference between Section 87A rebate and a deduction?
A deduction (like 80C) reduces your taxable income before tax is calculated. A rebate reduces the tax itself after it has been calculated. Section 87A is applied after your slab tax is computed — it directly cancels the tax amount, up to ₹60,000. This is why the slab tax still shows ₹52,500 in our calculator — that's the real tax before the rebate wipes it out.
Will this ₹0 tax continue in FY 2026-27?
Yes. Budget 2026 confirmed no changes to the Section 87A rebate limits. The ₹60,000 rebate for taxable income up to ₹12L under New Regime continues unchanged for FY 2026-27 (AY 2027-28).