The Budget 2025 headline was hard to miss: under the new tax regime, income up to Rs. 12,00,000 is effectively tax-free. So when your own computation shows a taxable income of, say, Rs. 12,20,000 and a tax of a few thousand rupees still sitting there, it feels like something has gone wrong. Nothing has gone wrong — this is marginal relief at work, and it is one of the most misunderstood corners of the new regime.
Below we explain, in plain language and with worked numbers, why a taxpayer just above Rs. 12,00,000 still pays a small tax, exactly how much, and the precise income band where this quirk applies.
What the “Rs. 12 lakh tax-free” promise really is
From FY 2025-26, the rebate under section 87A in the new regime was raised to Rs. 60,000, available where total (taxable) income is up to Rs. 12,00,000. At exactly Rs. 12,00,000 the slab tax works out to Rs. 60,000, the rebate wipes it out, and you pay nil. The important detail people miss: the rebate is an all-or-nothing threshold. The moment your taxable income is even Re. 1 over Rs. 12,00,000, the full rebate is no longer available.
So why isn’t your tax zero just above Rs. 12 lakh?
Without a cushion, someone at Rs. 12,10,000 would suddenly owe the full slab tax while someone at Rs. 12,00,000 pays nothing — a Rs. 10,000 rise in income triggering a jump of tens of thousands in tax. To prevent that cliff-edge, the law provides marginal relief.
What marginal relief actually does
The rule is simple to state: the tax you pay cannot exceed the amount by which your income crosses Rs. 12,00,000. In other words, if your income is Rs. 20,610 above the line, your tax is capped at Rs. 20,610 (plus cess), no matter what the slab tax would otherwise have been.
A worked example
Suppose your taxable income is Rs. 12,20,610 (salary plus a little bank interest, after the Rs. 75,000 standard deduction and your employer’s NPS contribution). Here is how the tax is built up:
| Step | Amount (Rs.) |
|---|---|
| Slab tax on Rs. 12,20,610 (nil to 4L; 5% 4–8L = 20,000; 10% 8–12L = 40,000; 15% on 20,610 = 3,092) | 63,092 |
| Income above Rs. 12,00,000 | 20,610 |
| Marginal relief (tax capped at the excess) | 63,092 − 20,610 = 42,482 |
| Tax after marginal relief | 20,610 |
| Add 4% health & education cess | 824 |
| Total tax payable | 21,434 |
So instead of Rs. 63,092, you pay Rs. 21,434 — marginal relief saved you Rs. 42,482. You can check your own figure in seconds with our Income Tax Calculator.
Up to what income does marginal relief help?
Marginal relief keeps working only while the normal slab tax is higher than the excess over Rs. 12,00,000. The two become equal — the break-even point — at a taxable income of about Rs. 12,70,588. Between Rs. 12,00,000 and this figure you pay only the excess; beyond it, ordinary slab tax is already lower, so relief no longer changes anything.
| Taxable income (Rs.) | Normal slab tax (Rs.) | Income above Rs. 12L (Rs.) | Tax payable, pre-cess (Rs.) |
|---|---|---|---|
| 12,00,000 | 60,000 | 0 | Nil (full rebate) |
| 12,10,000 | 61,500 | 10,000 | 10,000 |
| 12,20,610 | 63,092 | 20,610 | 20,610 |
| 12,50,000 | 67,500 | 50,000 | 50,000 |
| 12,70,588 | 70,588 | 70,588 | 70,588 (break-even) |
| 13,00,000 | 75,000 | 1,00,000 | 75,000 (no relief) |
A 4% health and education cess applies on the figures in the last column.
Salaried? Mind the standard deduction
The Rs. 12,00,000 test is on taxable income — that is, after the Rs. 75,000 standard deduction available to salaried taxpayers in the new regime. So a salaried person can draw a gross salary of up to Rs. 12,75,000 and still bring taxable income down to Rs. 12,00,000 (zero tax). In gross-salary terms, the marginal-relief band runs up to roughly Rs. 13,45,000. Any employer NPS contribution under section 80CCD(2) reduces taxable income further and pushes these thresholds higher still.
Can you legitimately get back to zero?
For a financial year that has already closed, there is little you can change — deductions had to be in place during the year itself. But if you are planning ahead, the main lever left in the new regime is your employer’s NPS contribution under section 80CCD(2) (deductible up to 14% of basic salary), which reduces taxable income rupee-for-rupee and can bring you back to the Rs. 12,00,000 line. It is worth comparing both regimes before you decide — our Old vs New Regime Excel utility does this side by side. And if your own situation needs a closer look, you can ask a Chartered Accountant on our free forum.
Key takeaways
- The Rs. 60,000 section 87A rebate makes income tax-free — but only up to exactly Rs. 12,00,000.
- Just above that, marginal relief caps your tax at the amount by which your income exceeds Rs. 12,00,000.
- Relief applies on taxable income up to about Rs. 12,70,588; beyond that, normal slab tax applies in full.
- A 4% health and education cess is added on the final tax.
- For salaried taxpayers, the Rs. 75,000 standard deduction shifts all of these thresholds up by Rs. 75,000 in gross-salary terms.
Frequently Asked Questions
Is income up to Rs. 12 lakh really tax-free in FY 2025-26?
Yes — under the new tax regime, a taxable income up to Rs. 12,00,000 attracts nil tax because of the enhanced Rs. 60,000 rebate under section 87A. For salaried individuals, the Rs. 75,000 standard deduction means a gross salary of up to about Rs. 12,75,000 can still result in zero tax.
Why do I still pay tax when my income is Rs. 12.2 lakh?
Because the full rebate is only available up to Rs. 12,00,000. Above it you get marginal relief instead, which limits your tax to the amount by which your income exceeds Rs. 12,00,000 — so at Rs. 12,20,610 your tax is Rs. 20,610 plus cess, not the full Rs. 63,092.
Up to what income does marginal relief apply?
On taxable income up to approximately Rs. 12,70,588. Beyond that point the ordinary slab tax is lower than the relief figure, so you simply pay normal slab tax.
Does the old regime give the same Rs. 12 lakh benefit?
No. Under the old regime the section 87A rebate is limited to Rs. 12,500 and applies only where total income is up to Rs. 5,00,000. The Rs. 12,00,000 tax-free level is a new-regime feature.
Do I have to claim marginal relief separately?
No — it is built into the tax computation and is applied automatically when you file your return, and by any reliable calculator such as our Income Tax Calculator.