Income Tax Exemption Limit Explained: How Much Income Is Tax-Free?
In the Union Budget FY 2025-26, taxation laws shifted, but one question still remains universal: what is the zero tax income tax limit?
The answer is not as simple as a single number. The income tax exemption limit determines how much of your income is taxed at 0%, but your final liability depends on slab rates, deductions, and the rebate under Section 87A. Under the revised framework, the new tax regime offers a higher zero-tax threshold, while the old regime continues to provide deductions that may benefit certain taxpayers.
Read further as it follows a detailed explanation on the income tax exemption limit India provides, comparison of the new and old tax regime exemption limit, and more!
Understanding The Concept Of Tax-Free Income
In the Union Budget 2025–26, the government clarified that under the new tax regime, resident individuals with total income up to INR 12 lakh will have no tax liability after applying the rebate under Section 87A for AY 2026–27. For salaried taxpayers, this effective zero-tax threshold extends to INR 12.75 lakh, after accounting for the INR 75,000 standard deduction available under the revised framework. This benefit applies when the total income falls within the specified limits under the applicable slab structure of the new regime.
However, it is important to understand that under the new regime the basic exemption limit income tax is INR 4 lakh for AY 2026-27, which means income up to this level is taxed at 0%2. The INR 12 lakh threshold works through a rebate under Section 87A, which offsets the calculated tax liability, effectively bringing payable tax to zero3.
Income Tax Exemption Limit Under Old & New Tax Regime
Under the new tax regime, the basic income tax exemption limit for AY 2026-27 is INR INR 4 lakh. This means if your taxable income for AY 2026-27 is INR 4 lakh or less after applicable deductions, the tax rate applied is 0%4.
In contrast to that, the old tax regime exemption limit is as follows:
| Individual under the age of 60 | INR 2.5 lakh |
| Senior Citizens (age 60-80 years) | INR 3 lakh |
| Super Senior Citizens ( over 80 years) | INR 5 lakh |
Source: IncomeTax India5
Comparison table of exemption limit under the old vs the new regime
Features | Old tax regime | New tax regime |
| Basic exemption limit | INR 2,50,000 | INR 4,00,000 (AY 2026-27) |
| Standard deduction | INR 50,000 | INR 75,000 |
| Rebate (Section 87A) | INR 12,500 | INR 60,000 (AY 2026-27) |
| Zero tax income limit | INR 5,00,000 | INR 12,00,000 (INR 12,75,000 considering standard deduction) |
| Deductions (80C, 80D) | Available up to INR 1,50,000 | Not available |
Source: Income Tax India6
How Rebate Under Section 87A Works
Rebates under Section 87A of the Income Tax Act play an important role in determining the tax-free income India allows under the new and old tax regimes. It provides a direct deduction for residential individuals with lower taxable income.
Under the new tax regime exemption limit, for AY 2026-27, a rebate is available up to INR 60,000 or 100% of income tax, whichever is less, if the taxable income is INR 12,00,000 or less7. And under the old tax regime exemption limit, the rebate is INR 12,500 or 100% of income tax, whichever is less, if taxable income is INR 5,00,000 or less.
Assuming that, the salary of an individual is INR 12,00,000 per year. So, here is how rebate works:
Particulars | Amount (INR) |
| Gross salary | 12,00,000 |
| Less: Standard deduction | (75,000) |
| Taxable income | 11,25,000 |
Tax calculation as per income tax slabs AY 2026-27:
Particulars | Amount (INR) |
| INR 0–INR 4,00,000 | – |
| INR 4,00,001–INR 8,00,000 | 20,000 |
| INR 8,00,001–INR 11,25,000 | 32,500 |
| Taxable income | 52,500 |
Since the total income is under INR 12,00,000, it applied for rebate under Section 87A.
Particulars | Amount (INR) |
| Tax before rebate | 52,500 |
| Less: Rebate U/S 87A | (52,500) |
| Final taxable income | 0 |
Income Types Covered Under Exemption Limit
The income tax exemption limit applies to total taxable income, which includes earnings from all major income heads unless specifically exempt.
1. Salary income: These are basic salary income, with additional allowances, and bonuses. After standard deduction (if applicable), the remaining taxable salary is counted toward the exemption limit.
2. Income from housing property: Rental income earned from property is included here after deducting municipal taxes and the standard deduction of 30%.
3. Profits & gains from business or profession: It includes net profit from business or professional activities, which is calculated after permissible expenses.
4. Capital gains: These include gains from the sale of capital assets such as shares, mutual funds units, or property. However, certain capital gains are taxed at special rates, which are separate from regular slab rates.
5. Income from other sources: It includes interest from savings accounts, fixed deposits, dividends, pension, and other miscellaneous income. These are added to total income unless specifically exempt.
How To Use Exemption Limits For Better Tax Planning
Here are a few tips to plan your taxes better, using the income tax exemption limits:
- Choose the tax regime wisely: You must compare the old and new tax regime exemption limits based on your income and applicable deductions.
- Use Section 87A rebate: If your income is close to INR 12 lakh under the new regime, deductions can keep you eligible for a full rebate under Section 87A and bring tax to zero.
- Utilise Section 80C: You can invest in tax-saving options such as PPF, ELSS, NSC, or pay life insurance premiums and home loan principal, which allows deductions up to INR 1.5 lakh under Section 80C.
- Utilise NPS: You can also invest for retirement to get tax benefits under Section 80CCD(1B)8.
Conclusion
The income tax exemption limit for AY 2026–27 makes it clear that zero tax liability depends on more than just a headline number. While the new tax regime allows individuals to pay no tax on income up to INR 12 lakh (INR 12.75 lakh for salaried taxpayers after standard deduction) through the Section 87A rebate, the old regime continues to suit those who benefit from deductions under Sections 80C, 80D, and other provisions. Choosing the right regime requires evaluating income structure, deductions, and long-term financial goals rather than focusing solely on exemption thresholds.
Strategic tax planning should work alongside smart investment decisions to improve post-tax outcomes. Beyond traditional tax-saving avenues, incorporating predictable fixed-income options can help balance tax efficiency with steady returns. Platforms like Grip Invest enable investors to explore curated fixed-income opportunities that complement tax planning while supporting consistent wealth creation.
FAQs On Income Tax Exemption Limit 2026
1. What is the new regime exemption limit for salaried employees?
For AY 2026-27, the basic exemption limit for income tax under the new regime is INR 4 lakh. However, due to Section 87A rebate, salaried individuals can have zero tax liability up to INR 12 lakh, and up to INR 12.75 lakh after INR 75,000 standard deduction.
2. Does the standard deduction count in the exemption limit?
No. The standard deduction reduces taxable income before tax is calculated. The exemption limit applies to taxable income after deductions. In the new regime, salaried individuals get INR 75,000 standard deduction.
3. What is the exemption limit for senior citizens?
Under the old tax regime, the basic exemption limit is INR 3 lakh for senior citizens (60–80 years) and INR 5 lakh for super senior citizens (80+). Under the new regime, the exemption limit is uniform, regardless of age.
References:
1. PIB, accessed from: https://www.pib.gov.in/PressReleasePage.aspx?PRID=2098406®=3&lang=2
2. Income Tax India, accessed from: https://incometaxindia.gov.in/Tutorials/2%20Tax%20Rates.pdf
3. Income Tax India, accessed from: https://www.incometax.gov.in/iec/foportal/help/new-tax-vs-old-tax-regime-faqs
4. PIB, accessed from: https://www.pib.gov.in/PressReleasePage.aspx?PRID=2098406®=3&lang=2
5. Income Tax India, accessed from: https://incometaxindia.gov.in/booklets%20%20pamphlets/3-new-tax-regime-vs-old-tax-regime.pdf
6. Income Tax India, accessed from: https://incometaxindia.gov.in/Tutorials/2%20Tax%20Rates.pdf
7. Income Tax India, accessed from: https://shorturl.at/yfxme
8. Tax2win, accessed from: https://tax2win.in/guide/section-80ccd
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