Budget 2026: No Tax Up to ₹12 Lakh! How the New Income Tax Act Benefits You.

Choosing the right tax regime can make a significant difference in your take-home income. For middle-class salaried employees, the decision between the Old and New Tax Regimes in 2026 revolves around understanding how deductions, exemptions, and rebates affect your overall tax liability. This post focuses on the ₹12.75 lakh "zero tax" sweet spot, which includes ₹12 lakh income plus the ₹75,000 standard deduction, to help you decide which regime suits you best.

Comparison of Old and New Tax Regimes for Middle-Class Salaried Employees

Comparison of tax calculations for middle-class salaried employees focusing on the ₹12.75 lakh income bracket

Understanding the Basics of Both Tax Regimes

Before diving into the numbers, it’s important to clarify the key features of the Old and New Tax Regimes.

Old Tax Regime

• Basic exemption limit: ₹2.5 lakh

• Allows multiple deductions and exemptions such as House Rent Allowance (HRA), Leave Travel Allowance (LTA), investments under Section 80C, and more.

• Standard deduction of ₹75,000 applies.

• Rebate under Section 87A applies only up to ₹5 lakh taxable income, which means no rebate benefit beyond that.

• Still available in 2026 but without updated rebate benefits for incomes above ₹5 lakh.

  
  

New Tax Regime

• Basic exemption limit: ₹4 lakh

• Offers lower tax rates but removes most exemptions and deductions.

• Standard deduction of ₹75,000 is included.

• Rebate under Section 87A extended up to ₹7 lakh taxable income.

• Designed to simplify tax filing with fewer deductions to claim.

  
  

The ₹12.75 Lakh Sweet Spot Explained

The ₹12.75 lakh figure comes from combining ₹12 lakh income with the ₹75,000 standard deduction. This is a critical threshold because it represents a common income level for many middle-class salaried employees. Understanding how tax liability changes around this point helps in choosing the right regime.

Comparing Tax Calculations at ₹12.75 Lakh Income

Feature	Old Regime	New Regime
Basic Exemption Limit	₹2.5 lakh	₹4 lakh
Standard Deduction	₹75,000	₹75,000
Other Deductions Allowed	Yes (e.g., 80C, HRA, LTA)	No
Tax Slabs (Income in ₹)	2.5L-5L: 5%, 5L-10L: 20%, >10L: 30%	4L-7.5L: 10%, 7.5L-10L: 15%, 10L-12.5L: 20%, >12.5L: 30%
Rebate under Section 87A	Up to ₹5 lakh taxable income	Up to ₹7 lakh taxable income
Tax Payable at ₹12.75L Income	Higher due to fewer rebates and deductions	Lower due to higher exemption and rebate

Example Calculation

• Old Regime:

Taxable income after ₹75,000 standard deduction = ₹12,00,000

Without other deductions, tax slabs apply starting at ₹2.5 lakh. The rebate under 87A does not apply here because taxable income exceeds ₹5 lakh.

Result: Higher tax liability.

• New Regime:

Taxable income after ₹75,000 standard deduction = ₹12,00,000

Basic exemption is ₹4 lakh, and rebate applies up to ₹7 lakh taxable income. The slabs have lower rates for the middle slabs.

Result: Generally lower tax liability for incomes around ₹12.75 lakh without deductions.

When the Old Regime Still Makes Sense

Despite the New Regime’s appeal, the Old Regime remains beneficial for many, especially those who:

• Have significant investments under Section 80C (up to ₹1.5 lakh), such as Provident Fund, ELSS, or life insurance.

• Claim House Rent Allowance (HRA) or other allowances.

• Have medical insurance premiums or education loan interest deductions.

• Benefit from deductions that reduce taxable income below ₹5 lakh, enabling the rebate under Section 87A.

  
  

For example, a salaried employee earning ₹12.75 lakh with ₹2 lakh in eligible deductions will see a taxable income of ₹10.75 lakh under the Old Regime, which may result in lower tax than the New Regime.

Who Should Choose What

| Profile | Recommended Regime | Reason |

|--------------------------------|-------------------------------|-----------------------------------------------------------------------------------------|

| Salaried employee with few deductions | New Regime | Higher exemption limit and simplified filing with lower tax rates on middle slabs. |

| Salaried employee with multiple deductions | Old Regime | Ability to claim deductions and exemptions reduces taxable income significantly. |

| Income close to or below ₹7 lakh | New Regime | Rebate under 87A applies, reducing tax liability effectively. |

| Income above ₹10 lakh with investments | Old Regime | Deductions under 80C and others can outweigh benefits of New Regime slabs. |

Practical Tips for Middle-Class Taxpayers

• Calculate both ways: Use online tax calculators to compare your tax liability under both regimes based on your actual deductions.

• Review investments: If you have tax-saving investments, the Old Regime might save you more.

• Consider simplicity: If you prefer fewer documents and simpler filing, the New Regime is attractive.

• Plan for the future: Tax laws can change, so stay updated on any changes to rebates or slabs.

• Use the ₹75,000 standard deduction: This applies in both regimes and reduces taxable income.