New Tax Regime FY26: Is Your Tax-Free Income Really ₹12.75 Lakh?

The government has widely claimed that under the new tax regime for FY 2025-26, income up to ₹12.75 lakh will be completely tax-free. This figure has been cited in press releases, speeches, and news articles. However, a close look at the Finance Act, 2025 reveals something surprising — the actual tax-free limit is only ₹12.5 lakh. So, what explains this difference?

Let’s break it down.

Understanding the FY26 Tax Regime Structure

Under the new tax regime for FY 2025–26, the government claims that salaried individuals can earn up to ₹12.75 lakh without paying any tax. Here’s how it’s supposed to work: a person earning ₹12.75 lakh gets a standard deduction of ₹75,000, which brings their taxable income down to ₹12 lakh. The tax on ₹12 lakh is ₹60,000, but this is completely cancelled out by the rebate under Section 87A. So, on paper, the final tax comes to zero.

However, there’s a problem — the law doesn’t clearly state that the ₹75,000 standard deduction applies this year. If only the older ₹50,000 deduction is valid, then the tax-free income is actually just ₹12.5 lakh, not ₹12.75 lakh.

The Hidden Gap in the Finance Act

The confusion comes from how three tax rules are supposed to work together — but they don’t match up properly this year.

• Section 115BAC sets the new tax slabs. For the current financial year (2025–26), a specific clause (clause iii) applies.

• Section 87A gives a tax rebate. This was increased, so now people with taxable income up to ₹12 lakh don’t have to pay any tax — they get a ₹60,000 rebate.

• Section 16 gives a standard deduction from salary income. Last year, this deduction was increased to ₹75,000 — but only for that year (2024–25).

The problem? The law doesn’t say this ₹75,000 deduction is available in 2025–26. So for now, only the older ₹50,000 deduction applies.

Because of this, the total tax-free income for salaried people isn’t ₹12.75 lakh as claimed — it’s only ₹12.5 lakh. 

What Can the Government Do?

This seems to be a drafting mistake. The government can fix it in 3 different ways. It can pass an ordinance to give the correction legal effect. Then, it can formally pass the law when the Parliament is in session.

The government can also issue a corrigendum to correct the specific wording in the relevant section.

Conclusion

The confusion over the actual tax-free income under the new tax regime highlights how critical proper drafting is. Until this is corrected, taxpayers expecting zero tax at ₹12.75 lakh may face surprise bills. A clear clarification or amendment is urgently needed to ensure trust and fairness.

Read more on: ITR Filing 2025: Form 16 Will Come in a New Format – Here’s What You Need to Know

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