Under the new regime FY 2025-26, salaried filers pay zero tax up to ₹12.75 lakh of CTC (₹12 lakh after ₹75,000 standard deduction). Section 87A rebate wipes out tax on income up to ₹12 lakh. Above that, marginal relief means an extra ₹1 doesn't cost more than ₹1 in tax. Budget 2025 raised the rebate from ₹7 lakh to ₹12 lakh - the biggest middle-class tax change in years.
What changed in FY 2025-26
The Budget 2025 announcement made the new regime substantially more attractive:
• Standard deduction raised from ₹50K to ₹75K
• 87A rebate limit raised from ₹7 lakh to ₹12 lakh
• Brackets restructured: 0% to ₹4L, then 5/10/15/20/25/30%
Result: a salaried earner with ₹12.75 lakh CTC pays ZERO tax under the new regime. This is the biggest expansion of zero-tax income in India's history.
How Section 87A actually works
It's NOT a deduction - it's a rebate that zeros out the computed tax.
Computation flow:
1. Compute total income
2. Subtract standard deduction (₹75K new regime, ₹50K old)
3. Apply slabs to get tax
4. If taxable income ≤ ₹12 lakh (new) / ₹5 lakh (old): rebate = full tax = 0
5. Add 4% Health & Education Cess (on positive tax only - so 0 + 4% = 0)
Worked examples:
Salaried with ₹10 lakh CTC, new regime:
• Income after std deduction: ₹9.25 lakh
• Tax: 0% + 5% × 4 = ₹20K + 10% × 1.25 = ₹12.5K = ₹32.5K
• 87A rebate: ₹32,500 (full tax wiped)
• Final tax: ₹0
Salaried with ₹12.5 lakh CTC, new regime:
• After std deduction: ₹11.75 lakh - eligible for 87A
• Tax: ₹20K + ₹40K + 15% × ₹0 = ₹60K
• 87A rebate: ₹60,000
• Final tax: ₹0
Salaried with ₹13 lakh CTC, new regime:
• After std deduction: ₹12.25 lakh - over ₹12L threshold, NO 87A
• Tax: ₹20K + ₹40K + 15% × ₹25K = ₹63,750
• Cess 4%: ₹2,550
• Final tax: ₹66,300
Marginal relief above ₹12 lakh
There's a fairness mechanism: at ₹12,01,000 income, you don't suddenly owe ₹60,000+ in tax. Marginal relief caps your tax at the income exceeding ₹12 lakh.
At ₹12,10,000 (₹10K above): tax can't exceed ₹10,000.
The relief phases out as income approaches ₹12.75 lakh (where the full computed tax becomes lower than the marginal relief cap). After that, you pay full computed tax including cess.
This prevents the "rebate cliff" that haunted earlier 87A versions.
Old regime still wins for some
Old regime keeps ₹5L 87A rebate but allows deductions:
• HRA exemption (city rent dependent, easily ₹2-3L for metro)
• 80C up to ₹1.5L (PPF, ELSS, LIC, EPF)
• 80D up to ₹50K
• Section 24(b) home loan interest up to ₹2L
Old regime wins when: combined deductions + exemptions exceed roughly ₹4 lakh on salary. Most metro renters with home loan + 80C + HRA fit this.
New regime wins when: deductions are limited (no home loan, suburban rent, only 80C). Also wins for very high earners (₹50L+) where old regime's deductions cap out and new regime's 30% bracket only starts at ₹15L.
Common mistakes
1. Forgetting to opt in to old regime: new regime is the default for FY 2025-26. To use old regime, salaried files Form 10-IEA OR informs employer to deduct under old regime.
2. Calculating standard deduction wrong: ₹75K under new, ₹50K under old. Counts ONLY for salaried (not freelancers).
3. Capital gains and 87A: STCG on equity (15-20%) and LTCG on equity (12.5%) ARE eligible for 87A rebate. Specific computation rules apply.
4. Surcharge confusion: 87A only zeros income tax. Surcharge (10-25% above ₹50L) and cess apply separately on positive tax only.
5. Switching regimes: salaried can switch each year. Business income filers can switch only once back to old regime after opting out.
Run the math for your situation
Use our 🇮🇳 India calculator to plug in your own numbers and see exactly what you owe / save.
Yes - ₹75K standard deduction reduces taxable to ₹12 lakh, then 87A wipes out the tax. Verified by CBDT FAQ.
What if I exceed by ₹1?
Marginal relief applies in new regime - your tax can't exceed the income above the threshold. So at ₹12,01,000 you don't pay full tax on the ₹1.
Does 87A apply to senior citizens?
Yes - all resident individuals regardless of age. Old-regime exemption is higher for seniors (₹3L/₹5L), so 87A often makes no difference.
Capital gains and 87A?
STCG on equity (20%) and LTCG on equity (12.5%) ARE eligible for 87A rebate in computing total tax. Specific provisions apply.
How do I opt for old regime?
Salaried: declare to employer at year start (Form 10-IEA may be needed). For ITR filing: select old regime in the form. Default is now new regime.
Key takeaways
Default is the new regime since AY 2024-25; opt into old regime explicitly via Form 10-IEA.
Section 87A rebate covers all tax up to Rs 12.75 lakh gross income in the new regime (Budget 2025).
Rough rule: if your total old-regime deductions exceed Rs 4-5 lakh, the old regime usually wins.
HRA exemption, 80C deduction, and Section 24(b) home loan interest are old-regime-only benefits.
Standard deduction: Rs 75,000 in new regime vs Rs 50,000 in old regime.
Salaried employees can switch regime annually; self-employed / business income can switch only once in lifetime.
By audience: what to focus on
Different reader types need different angles on this topic. Pick the one closest to your situation.
Salaried employees
Maximise tax-advantaged retirement contributions (EPF/401(k)/SIPP/RRSP). Check whether your country prefers the old vs new regime, employer-match thresholds, and salary-sacrifice options. Use the calculators below with your CTC / gross income.
Freelancers / self-employed
You bear higher self-employment tax + lose the employer match, but get access to higher contribution limits (Solo 401k, SEP-IRA, NPS Tier-I). Track business expenses meticulously. Quarterly estimated tax payments avoid underpayment penalty.
NRIs / expats
Tax residency rules (183-day, tie-breaker), double-taxation treaties, foreign tax credits all come into play. NRI restrictions on PPF (no new accounts) but expanded options on NPS. Cross-border income often needs specialist advice.
Retirees / pre-retirees
Sequence-of-returns risk in early retirement is the largest threat. Glide-path asset allocation, Roth-conversion analysis in low-income years, Required Minimum Distribution planning, and Medicare/healthcare gap funding (US) are the big items.
Quick reference: 12 specific scenarios
Scan the question list, expand only the rows that match your situation.
Should I choose the old or new tax regime?
Rough rule: if your total old-regime deductions (Section 80C + HRA + 24b + 80D + 80CCD(1B) + standard) exceed about Rs 4-5 lakh, the old regime usually wins. Otherwise the new regime wins, especially below Rs 12.75 lakh gross income where the new regime's 87A rebate gives zero tax. Use our regime comparator below to check both for your exact inputs.
What deductions are available only in the old regime?
Section 80C (Rs 1.5 lakh: PPF, ELSS, EPF, life insurance, home loan principal, tuition fees), HRA exemption, Section 24(b) home loan interest (Rs 2 lakh self-occupied), Section 80D health insurance (Rs 25k self / Rs 50k senior parents), Section 80CCD(1B) NPS (extra Rs 50k), Section 80E education loan interest, Section 80TTA/TTB savings interest. None of these are available in the new regime.
What's available in the new regime?
Lower slab rates (Nil / 5% / 10% / 15% / 20% / 30%) and a higher standard deduction of Rs 75,000 (vs Rs 50,000 in old regime). Section 87A rebate gives full tax waiver up to Rs 12.75 lakh gross income (Budget 2025). Employer NPS contribution (80CCD(2)) up to 14% of basic is allowed in both regimes.
Which regime is the default?
From AY 2024-25 onwards, the NEW regime is the default. To opt into the old regime, salaried employees must explicitly choose it each year via Form 10-IEA (filed before due date) or via the employer's investment declaration. Self-employed / business taxpayers can switch only once.
Can I switch between old and new regime each year?
Salaried employees CAN switch each year, but must signal the choice to the employer before the start of the financial year (or accept the new-regime default). Self-employed / business income taxpayers can switch only once in their lifetime - choose carefully.
How does Section 87A rebate work in the new regime?
Under the new regime, if your total taxable income is below Rs 12.75 lakh (Rs 12 lakh + Rs 75k standard deduction = effective threshold Rs 12.75L gross), the Section 87A rebate covers ALL the tax due, making your effective income tax ZERO. This is the single biggest reason most salaried Indians earning under Rs 13 lakh now prefer the new regime.
What is the marginal relief in the new regime?
If your income marginally exceeds the rebate threshold (Rs 12.75 lakh), the tax can jump significantly. Marginal relief caps the tax increase to the amount by which income exceeds the threshold. So an income of Rs 12.80 lakh doesn't pay full slab tax - the marginal-relief mechanism limits the tax to Rs 5,000 (the income above threshold).
Does HRA exemption apply in the new regime?
No. HRA exemption is an old-regime-only benefit. Under the new regime, the entire HRA you receive is added to taxable income with no exemption. This is a major reason metro-city renters with significant HRA may still find the old regime more tax-efficient.
Can I claim home loan interest in the new regime?
Self-occupied home loan interest (Section 24b, Rs 2 lakh) is NOT available in the new regime. Let-out / rented property home loan interest IS available in BOTH regimes against rental income (but with rental income loss capped at Rs 2 lakh against other heads in both).
How does the regime choice affect my TDS at source?
Your employer deducts TDS based on the regime you declare in your investment declaration (Form 12BB). If you don't declare, the employer applies the new regime by default. You can recover excess TDS by claiming the old regime when filing your ITR if it works out better.
Is the new regime always better for low-income earners?
Below Rs 12.75 lakh gross income, the new regime usually wins because of the 87A rebate covering all tax. Even if you have Rs 1.5 lakh of 80C deductions, the old regime would still pay Rs 50k+ in tax above Rs 7 lakh income, whereas the new regime pays zero up to Rs 12.75 lakh. The old regime wins only at higher incomes with very large deduction stacks.
Does the new regime allow PPF / NPS investments?
Yes, you can INVEST in PPF / NPS in either regime, but you can only CLAIM the deduction in the OLD regime. NPS Tier-I employer contribution (Section 80CCD(2)) up to 14% of basic salary is the one NPS-related deduction allowed in both regimes.
Related topics readers also search for
Common adjacent queries on this topic. Each calculator and explainer linked below covers one or more of these specifically.
old vs new tax regime calculatorsection 87A rebate explainedHRA exemption calculation80C deduction listsection 24b home loan interestnew tax regime slab rates 2026marginal relief new regimeform 10-IEA filingNPS additional deduction 80CCD(1B)standard deduction new regime
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