Zero Tax on ₹12 Lakh Income: How Section 87A and Tax Slabs Really Work

By Ventura Research Team 3 min Read Feb 11, 2026

Section 87A rebate calculation showing zero tax on ₹12 lakh income under new tax regime FY 2025-26

The government’s announcement of “zero tax on income up to ₹12 lakh” created excitement and confusion at the same time. Many taxpayers began asking a simple question:

If there is zero tax up to ₹12 lakh, why do tax slabs still exist?

The answer lies in understanding how India’s progressive tax system works and how Section 87A plays a crucial role in eliminating the final tax liability.

Understanding India’s Tax Slab System

India follows a progressive tax structure. This means income is divided into different slabs, and each slab is taxed at a different rate. Even under the revised new tax regime, slabs continue to operate as the foundation of tax calculation.

Under the updated structure, income is taxed in stages; lower income portions attract lower rates, and higher portions attract higher rates. This system ensures fairness, as people earning more pay a higher percentage on the additional income.

Importantly, slabs are used to calculate the initial tax amount. They have not been removed, nor have they been replaced. Instead, what has changed is how the final tax liability is reduced.

India taxes income using progressive tax rates arranged in slabs. Under the new tax regime (effective FY 2025-26 and AY 2026-27):

Income Range (₹)	Tax Rate
0 – 4 Lakh	Nil
4 L – 8 L	5%
8 L – 12 L	10%
12 L – 16 L	15%
16 L – 20 L	20%
20 L – 24 L	25%
Above 24 L	30%

What Does “Zero Tax up to ₹12 Lakh” Actually Mean?

When the government says there is zero tax on income up to ₹12 lakh, it does not mean ₹12 lakh has become the basic exemption limit. It also does not mean slab rates up to ₹12 lakh are 0%.

Instead, tax is first calculated normally according to slab rates. After this calculation, a rebate under Section 87A is applied. If the taxable income is up to ₹12 lakh, the rebate reduces the final tax payable to zero.

So technically, tax is calculated, but it is later eliminated.

The Key Role of Section 87A

Section 87A of the Income Tax Act provides a rebate to resident individual taxpayers. A rebate is different from an exemption.

An exemption reduces taxable income before tax is calculated.

A rebate reduces the tax amount after it has been calculated.

This distinction is extremely important.

Under the revised rules, if your net taxable income does not exceed ₹12 lakh, you are eligible for a rebate that can completely offset the tax calculated under the slab system. The rebate effectively neutralises the entire tax liability up to the eligible limit.

This is why Section 87A plays the most critical role in ensuring zero tax on ₹12 lakh income.

How the Calculation Actually Works: Real Example

Suppose your taxable income is ₹12,00,000 under the new tax regime.

Step 1: Tax as Per Slabs

₹0 to ₹4,00,000 ⇒ Nil

₹4,00,000 to ₹8,00,000 at 5% ⇒ ₹20,000

₹8,00,000 to ₹12,00,000 at 10% ⇒ ₹40,000

Total tax before rebate: ₹60,000

Step 2: Section 87A Rebate

Since taxable income does not exceed ₹12 lakh, you are eligible for a rebate up to ₹60,000 under Section 87A.

Tax calculated: ₹60,000
Rebate: ₹60,000

Final Tax Payable: ₹0

The slabs cost ₹60,000.
Section 87A eliminates it.

Why Not Simply Make ₹12 Lakh the Basic Exemption Limit?

Many people wonder why the government doesn’t just make ₹12 lakh fully tax-free by removing slabs up to that level.

There are practical reasons:

First, slabs maintain the progressive structure of taxation. This ensures fairness across income groups.

Second, retaining slabs provides flexibility for future policy adjustments. The government can modify rebate limits without restructuring the entire tax system.

Third, using a rebate instead of increasing the exemption limit allows the system to maintain tax discipline and reporting consistency.

In simple terms, slabs form the backbone of tax computation, while Section 87A acts as a relief mechanism.

Important Conditions to Remember

The zero-tax benefit applies only if your net taxable income does not exceed ₹12 lakh. If your income crosses this threshold, even slightly, the rebate benefit may not fully apply.

Additionally, certain types of income that are taxed at special rates, such as some capital gains, may not be fully covered under the rebate provisions.

Also, even if your final tax payable becomes zero after a rebate, filing an income tax return may still be mandatory depending on your income and compliance requirements.