Income Tax Return filing: India's income tax landscape has undergone a dramatic transformation over the past few years. What was once a tax-free income threshold of ₹2 lakh has now effectively risen to ₹12.75 lakh for salaried individuals under the new tax regime in FY2026-27, thanks to a combination of revised slabs, a higher Section 87A rebate and the standard deduction.

The changes have prompted many taxpayers to ask an obvious question: Can even higher incomes be made tax-free?

The answer, experts say, is yes.

How ₹12.75 lakh becomes completely tax-free

Under the new tax regime, taxpayers with a taxable income of up to ₹12 lakh are eligible for a Section 87A rebate, which effectively wipes out their entire tax liability.

For salaried individuals, the ₹75,000 standard deduction further raises the zero-tax threshold to ₹12.75 lakh.

Component    Amount (₹)
Gross salary income    12,75,000
Less: Standard deduction    75,000
Net taxable income    12,00,000
Tax as per slabs    60,000
Less: Section 87A rebate    60,000
Final tax liability    Nil

As a result, salaried taxpayers and pensioners earning up to ₹12.75 lakh annually will pay no income tax under the new regime.

The tax-free limit has come a long way

The effective tax-free threshold has expanded significantly over the years.

Earlier exemption limit: ₹2 lakh
Later increased to ₹2.5 lakh
Under the previous new regime: ₹7 lakh
FY2026-27 effective tax-free salary: ₹12.75 lakh

The new regime remains the default tax structure and is increasingly proving beneficial for most salaried employees.

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Can the tax-free limit go beyond ₹12.75 lakh?

Yes, under certain conditions.

Apart from the ₹75,000 standard deduction, salaried employees can now receive up to ₹15,000 annually in tax-free gift or festival vouchers from employers, up from ₹5,000 earlier. This effectively raises the zero-tax threshold to ₹12.90 lakh.

With careful salary structuring, the tax-free ceiling can go even higher. A Cost to Company (CTC) of ₹14.80 lakh can still result in zero tax liability if employer contributions to retirement benefits are included.

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How a ₹14.80 lakh CTC can attract zero tax

Component    Amount (₹)
Annual CTC    14,80,000
Employer NPS contribution (14% of basic pay)    1,02,550
Employer EPF contribution (12% of basic pay)    87,900
Standard deduction    75,000
Gift vouchers    15,000
Total deductions and exemptions    2,80,450
Taxable income    ~11,85,000

Since the taxable income falls below ₹12 lakh, the taxpayer becomes eligible for the Section 87A rebate, reducing the final tax liability to zero.

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Important conditions apply

This benefit is not automatic and depends heavily on salary structuring.

To achieve the ₹14.80 lakh zero-tax level, the compensation package must include employer contributions to EPF and NPS. Without these components, taxable income may exceed ₹12 lakh, resulting in tax liability.

In addition, the Section 87A rebate applies only to income taxed under normal slab rates. Special-rate income, such as capital gains, is not eligible for the rebate.

With no changes to tax slabs in Budget 2026, the new tax regime continues to provide significant relief. For many salaried taxpayers, the effective tax-free income limit is no longer capped at ₹7 lakh or even ₹12.75 lakh. With the right mix of deductions and employer contributions, it can extend to nearly ₹15 lakh.

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Published on: Jun 16, 2026 7:46 PM IST