Shocking Tax Relief: Nil Tax on Rs. 12 Lakh Income in FY 2025-26 – Here’s How!

Income Tax Structure in FY 2025-26

The Income Tax structure for FY 2025-26 continues to offer two primary regimes for taxpayers:

1. Old Regime – Offers various deductions and exemptions.
2. New Regime – Features lower tax rates but fewer deductions.

While the government has retained the basic exemption limit at Rs. 4 lakh, Nil Tax on Rs 12 Lakh Income is possible thanks to the Section 87A rebate. Taxpayers with taxable income up to Rs. 12 lakh can avail of this full tax rebate, significantly reducing their tax liability.

Section 87A: The Key to Nil Tax on Rs 12 Lakh Income

What is Section 87A?

Section 87A provides a rebate to eligible taxpayers, which can be deducted from the total tax payable. The rebate is equal to the tax liability but is capped at Rs. 12,500. This rebate is the primary reason why many taxpayers with an income of up to Rs. 12 lakh can pay Nil Tax on Rs 12 Lakh Income.

Eligibility Criteria for Section 87A Rebate

• Only resident individuals qualify for the Section 87A rebate.
• The total taxable income of the individual must not exceed Rs. 12 lakh.
• HUFs (Hindu Undivided Families) and non-residents are not eligible for this rebate.

Illustration: Tax Computation for Salaried Employees

Let’s walk through an example of how Nil Tax on Rs 12 Lakh Income works.

Example: Ms. Shobha

• Pension Income: Rs. 7,75,000
• Income from Interest & Dividends: Rs. 5,00,000
• Total Taxable Income: Rs. 12,00,000

Tax Calculation:

• Total Tax Payable: Rs. 60,000
• Rebate Under Section 87A: Rs. 60,000
• Final Tax Payable: Nil

In this case, Ms. Shobha, with a total taxable income of Rs. 12 lakh, can avail of the full Section 87A rebate and pay Nil Tax on Rs 12 Lakh Income.

Exclusion of Special Rate Incomes from Rebate

It’s important to note that special rate incomes, such as Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG), are excluded from this rebate. These types of income do not qualify for the Section 87A rebate.

Illustration: Tax Computation for Individuals with Capital Gains

Example: Mr. Amit

• Salary Income: Rs. 9,00,000
• STCG: Rs. 3,00,000
• Total Taxable Income: Rs. 12,00,000

Tax Calculation:

• Salary Income (After Standard Deduction): Rs. 8,25,000
• Tax on Normal Income: Rs. 22,500
• Rebate under Section 87A: Rs. 22,500
• Tax on STCG @ 20%: Rs. 60,000
• Final Tax Payable: Rs. 60,000

As seen in this example, the Nil Tax on Rs 12 Lakh Income applies only to normal income and not to special rate income like STCG, meaning Mr. Amit still has a tax liability on his capital gains.

Marginal Relief for Incomes Slightly Above Rs. 12 Lakh

Taxpayers whose taxable income slightly exceeds Rs. 12 lakh can avail of marginal relief. This ensures that the extra tax payable due to exceeding the Rs. 12 lakh threshold does not exceed the additional income over the Rs. 12 lakh limit.

Illustration: Tax Computation for Income Slightly Over Rs. 12 Lakh

Example: Mr. Anil

• Gross Income: Rs. 14,00,000
• Deductions (Standard + NPS): Rs. 1,75,000
• Taxable Income: Rs. 12,25,000

Tax Calculation:

• Tax Liability: Rs. 63,750
• Marginal Relief: Rs. 38,750
• Final Tax Payable: Rs. 25,000

In Mr. Anil’s case, marginal relief ensures that his tax liability is adjusted and reduced to Rs. 25,000, even though his taxable income slightly exceeds Rs. 12 lakh.

Thanks to the Nil Tax on Rs 12 Lakh Income provision under Section 87A, taxpayers can legally pay no tax on incomes up to Rs. 12 lakh in FY 2025-26. Even those with slightly higher income can benefit from marginal relief to reduce their tax liability. By understanding how to compute taxes effectively, taxpayers can make the most of available rebates and deductions to reduce their overall tax burden.