INCOME TAX INDIA 2025–26 - Zero Tax Up to ₹12.75 Lakh? Here's the Full Story

 

If you're a salaried employee earning up to ₹12.75 lakh this year — you may legally owe zero income tax. And millions of Indians still don't know this.

Every year, as tax season rolls around, panic sets in. "How much do I owe?" "Should I switch regimes?" "Did I miss a deduction?" Breathe. This guide breaks down everything about income tax in India for FY 2025–26 — in plain language, with real examples, and no jargon.

 

1. What Is Income Tax, Really?

Income tax is a portion of your annual earnings you pay to the Government of India. It's calculated on your total income — salary, business profits, rent, investments — after subtracting allowed deductions.

India uses a progressive slab system — the more you earn, the higher the rate. But only the portion in each bracket is taxed at that rate, not your entire income.

 

2. New Tax Regime Slabs for FY 2025–26 (Default)

Important: The New Tax Regime is now the default for all taxpayers. You don't need to do anything special to use it. If you want the Old Regime, you must actively opt in when filing your ITR.

 

Annual Income

Tax Rate

Status

Up to ₹4 lakh

0%

Tax Free

₹4 lakh – ₹8 lakh

5%

Very Low

₹8 lakh – ₹12 lakh

10%

Low

₹12 lakh – ₹16 lakh

15%

Moderate

₹16 lakh – ₹20 lakh

20%

Moderate

₹20 lakh – ₹24 lakh

25%

High

Above ₹24 lakh

30%

Highest

 

Note: A 4% Health & Education Cess is added on top of tax payable. Surcharge may apply for incomes above ₹50 lakh.

 

3. Why Millions Pay Zero Tax Now

Budget 2025 made three powerful changes that together create a zero-tax zone for most salaried earners:

Section 87A Rebate (Raised to ₹12 Lakh)

If your total taxable income is ₹12 lakh or below, a full rebate wipes your tax liability to ₹0. This was ₹7 lakh in FY 2023–24 — now raised to ₹12 lakh.

Standard Deduction of ₹75,000

Every salaried employee gets a flat ₹75,000 deduction automatically. So ₹12,00,000 + ₹75,000 = ₹12,75,000 is effectively tax-free for salaried individuals.

Basic Exemption Raised to ₹4 Lakh

The ground-floor exemption was raised from ₹3 lakh to ₹4 lakh — no tax at all on your first ₹4 lakh of income.

REAL-LIFE EXAMPLE

Priya, Software Developer, Bengaluru | CTC: ₹12 lakh/year

Standard Deduction applied: –₹75,000 → Taxable Income: ₹11,25,000

Computed tax under new slabs = ~₹62,500

Income is under ₹12 lakh → Section 87A rebate applies → Tax = ₹0 ✓

Priya pays zero income tax. She doesn't need to invest in PPF, LIC, or ELSS just to save tax.

 

4. Old Regime vs New Regime — Which Should You Choose?

There's no one-size-fits-all answer. It depends on how many deductions you claim.

 

Feature

Old Regime

New Regime (Default)

Tax Rates

Higher

Lower

Section 80C (₹1.5L)

Allowed

Not Allowed

HRA Exemption

Allowed

Not Allowed

Section 80D (Medical)

Allowed

Not Allowed

Home Loan Interest

Up to ₹2 lakh

Not Allowed

Standard Deduction

₹75,000

₹75,000 ✓

Zero Tax Limit

Depends on deductions

Up to ₹12 lakh ✓

Employer NPS (80CCD2)

Allowed

Allowed ✓

Best For

High deduction earners

Most salaried employees

 

When to Stick With the Old Regime

If your total deductions exceed ₹3.75 lakh, the old regime may save more. Consider it if you have:

→   Full ₹1.5L claim under 80C (PPF, ELSS, LIC)

→   HRA exemption of ₹2–3 lakh (living on rent in a metro city)

→   Home loan interest deduction (up to ₹2 lakh)

→   Health insurance premiums above ₹25,000 (Section 80D)

Pro tip: Use any online tax calculator to compare both regimes before deciding.

 

5. Top Tax-Saving Deductions (Old Regime)

If staying in the old regime, these are your best tools:

→   Section 80C (₹1.5 lakh limit) — PPF, ELSS mutual funds, LIC premiums, EPF, NSC, tax-saving FDs

→   Section 80D — Health insurance premium up to ₹25,000 (₹50,000 for senior citizens)

→   Section 24(b) — Home loan interest up to ₹2 lakh (self-occupied property)

→   HRA Exemption — Claim if your employer gives HRA and you pay rent

→   Section 80CCD(1B) — Extra ₹50,000 for NPS (National Pension System) contributions

→   Section 80G — Donations to registered charities (50–100% deductible)

→   Leave Travel Allowance (LTA) — Travel within India, twice in a 4-year block

 

Note: Section 80CCD(2) — employer's NPS contribution — is allowed even in the New Regime. If your company offers NPS, this is a powerful tax-free benefit to use.

 

6. How to File Your ITR: Step-by-Step

1.    Collect Your Documents — Form 16 from employer, bank statements, investment proofs, rent receipts, Aadhaar/PAN.

2.    Check Form 26AS & AIS — Log in to incometax.gov.in and verify your Annual Information Statement for TDS, income, and transactions.

3.    Choose Your ITR Form — ITR-1 (Sahaj) for salaried. ITR-2 for capital gains. ITR-3/4 for business income.

4.    Pick Your Regime — Default is New Regime. To switch to Old Regime, select it before submitting. Compare both first.

5.    File & e-Verify — Submit on incometax.gov.in or via ClearTax, Quicko, or myITreturn. Verify using Aadhaar OTP.

⚠ Deadline Alert: The due date for ITR filing for salaried individuals for FY 2025–26 (AY 2026–27) is typically July 31, 2026. Late filing attracts penalties up to ₹5,000. Don't wait for the last week!

 

7. New Income Tax Act 2025 — What Changes From April 2026?

The government introduced the IncomeTax Act 2025 to replace the Income Tax Act of 1961 — a 65-year-old law. The new Act uses simpler language, removes outdated provisions, and makes compliance easier.

→   Same tax slabs and rates continue — no tax hike for common taxpayers

→   Cleaner, shorter document — designed to reduce litigation

→   Effective from April 1, 2026

→   No drastic changes for individuals in Year 1

Think of it as switching from an old, confusing manual to a cleaner, updated edition. The rules stay mostly the same — the language just gets easier.

 

Quick Recap — Key Takeaways

→   Zero income tax for salaried employees earning up to ₹12.75 lakh under the New Regime

→   Basic exemption raised to ₹4 lakh; Section 87A rebate now covers up to ₹12 lakh

→   New Tax Regime is the default — actively choose Old Regime to claim deductions

→   Old Regime still better if you have large 80C, HRA, and home loan deductions

→   Standard deduction of ₹75,000 is available even in the New Regime

→   New Income Tax Act 2025 replaces the 1961 Act from April 1, 2026

→   ITR filing deadline is typically July 31, 2026 — file early!

Disclaimer: This article is for informational purposes only and is not financial or tax advice. Tax rules can change. Please consult a qualified CA or tax professional for your specific situation before filing.

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