6 Feb 2026Updated: May 2026
What Budget 2025 Means for Individual Taxpayers: Zero Tax up to ₹12 Lakh, New Slabs, and Key Caveats
Union Budget 2025, presented on 1 February 2025, delivered what is arguably the most significant restructuring of personal income tax in over a decade. For individual taxpayers assessing the income tax changes for AY 2026-27 (FY 2025-26), the headline is compelling: zero tax on income up to ₹12 lakh under the new regime. But the details — as always in tax — require careful reading.
The Headline: Zero Tax up to ₹12 Lakh
The zero-tax threshold is achieved through two provisions working together. First, the new regime's basic exemption limit has been raised to ₹4 lakh. Second, the rebate under Section 87A has been increased to ₹60,000. For an individual earning exactly ₹12 lakh under the new regime, the tax liability computed on the applicable slabs amounts to ₹60,000 — entirely offset by the Section 87A rebate, resulting in nil tax payable.
For salaried individuals and pensioners, the standard deduction of ₹75,000 under the new regime pushes this effective zero-tax threshold to ₹12.75 lakh of gross salary income.
New Tax Slabs Under the New Regime — Effective FY 2025-26
- ₹0 to ₹4,00,000 — Nil
- ₹4,00,001 to ₹8,00,000 — 5%
- ₹8,00,001 to ₹12,00,000 — 10%
- ₹12,00,001 to ₹16,00,000 — 15%
- ₹16,00,001 to ₹20,00,000 — 20%
- ₹20,00,001 to ₹24,00,000 — 25%
- Above ₹24,00,000 — 30%
A person earning ₹12,00,001 does not suddenly owe ₹60,000 in tax. The Act provides for marginal relief under Section 87A to prevent a cliff effect — the tax on income marginally above ₹12 lakh is capped so that it does not exceed the amount by which income exceeds ₹12 lakh. This ensures a smooth progression rather than a sudden tax spike at the boundary.
The Critical Caveat: Section 87A Rebate Does Not Cover Special Rate Incomes
This is the provision most commonly misread by taxpayers celebrating the zero-tax announcement. The enhanced Section 87A rebate applies only to income taxed at normal slab rates. It cannot be set off against tax computed on:
- Short-term capital gains on listed equity and equity mutual funds — Section 111A, taxed at 20% flat
- Long-term capital gains on equity and equity-oriented funds exceeding ₹1.25 lakh — Section 112A, taxed at 12.5% flat
- Long-term capital gains on property, debt funds, and other assets — Section 112
In practice: if you earn ₹10 lakh in salary and ₹3 lakh in STCG on equity shares, your salary income falls within the zero-tax threshold after the rebate — but the ₹3 lakh STCG is taxed at 20%, yielding ₹60,000 in tax (plus surcharge and cess). The 87A rebate provides no relief against this. This is a routine source of errors in self-filed returns and has generated scrutiny notices in multiple assessment years.
Who Should Still Consider the Old Regime?
The old regime — still available by filing Form 10-IEA before the ITR due date — remains beneficial for taxpayers whose aggregate eligible deductions and exemptions exceed approximately ₹3.75 lakh. Common components include:
- House Rent Allowance (HRA) under Section 10(13A) — for those paying significant rent in metro cities
- Section 80C (₹1.5 lakh limit) — LIC, PPF, ELSS, home loan principal repayment
- Section 80D — health insurance premiums (₹25,000 for self and family; ₹50,000 for senior citizen parents)
- Home loan interest under Section 24(b) — up to ₹2 lakh for self-occupied property
- Section 80CCD(1B) — additional ₹50,000 NPS contribution deduction, available only in the old regime
Standard Deduction: ₹75,000 Under the New Regime
The standard deduction for salaried employees and pensioners under the new tax regime has been enhanced to ₹75,000 per annum from FY 2025-26 (Finance Act 2025). This is an increase from the earlier ₹50,000 and reduces the effective taxable salary before slab computation.
Impact on TDS — What You Must Do Now
Employers deduct TDS on salary under Section 192 at new regime rates by default from FY 2025-26. If you have not declared your regime preference to your employer, TDS will be computed under the new regime. This may result in either excess TDS (beneficial from a cash flow perspective, but creates a refund situation) or a shortfall — both requiring reconciliation at ITR filing time, with interest implications under Sections 234B and 234C for shortfalls in advance tax.
Verify your Form 16 carefully once issued by June 15, 2026. Part A reflects TDS deducted; Part B should show the computation under your chosen regime. Discrepancies must be addressed before filing your return.
Practical Steps for FY 2025-26
- Run a comparative tax calculation under both regimes for your actual income, deductions, and capital gains profile.
- Declare your regime preference to your employer if you prefer the old regime.
- Segregate capital gains income before claiming the 87A rebate — apply the rebate only against slab-rate tax.
- Review advance tax liability and ensure quarterly payments are on schedule.
- File your ITR by 31 July 2026 (non-audit) to avoid belated return consequences under Section 139(4).
Regi Tom Antony And Associates is a Chartered Accountant firm in Kakkanad, Kochi, specialising in personal tax planning, ITR filing, capital gains advisory, and regime comparison for salaried individuals and business owners. For a tax computation tailored to your income profile, contact us at letstalk@rtaandassociates.com.