If you are a salaried professional, the February 1st Budget announcement is the final piece of a puzzle that began with the Income Tax Act, 2025. Why is “₹12 Lakh” the magic number this year? Truth be told, it’s not just a slab change; it’s a massive Section 87A rebate play. For the first time, individuals earning a gross salary of up to ₹12.75 lakh can effectively pay zero tax without touching a single ELSS fund or insurance policy.
How does this work, and why must you talk to your HR department before April 1st to ensure you don’t lose thousands to “Tax Deducted at Source” (TDS)?
Why the “Zero-Tax” Barrier has Shifted to ₹12.75 Lakh
Surprisingly, the government has used a two-pronged strategy to provide middle-class relief while pushing everyone toward the New Tax Regime.
- The Slab Shift: The basic exemption limit has been hiked to ₹4 lakh.
- The Rebate Power: Under Section 87A, if your taxable income stays at or below ₹12 lakh, the government gives you a rebate of up to ₹60,000, wiping out your tax liability entirely.
- The Standard Deduction Bonus: Since salaried employees get a flat ₹75,000 deduction, your gross can be ₹12.75 lakh, and your taxable income will still hit that ₹12 lakh “Sweet Spot.”
How to Restructure Your Salary Before April 1st
If your CTC (Cost to Company) is between ₹13 lakh and ₹15 lakh, you are in the “Danger Zone.” A single rupee over the limit could trigger a tax bill of over ₹60,000 because the 87A rebate disappears the moment you cross the threshold.
Here is how to restructure your pay components to stay under the limit:
1. Leverage the NPS (Section 80CCD(2))
This is the “Secret Weapon” of the New Tax Regime. While most deductions (like 80C) are gone, your employer’s contribution to NPS (up to 14% of your basic salary) is still tax-exempt.
- The Move: Ask your HR to divert a portion of your special allowance into the Corporate NPS. This lowers your “Gross Taxable Income” without reducing your CTC.
2. Opt for Tax-Free Perquisites
In 2026, cash is expensive (tax-wise), but perks are cheaper. Restructure your salary to include:
- Meal Vouchers (Digitized): Up to ₹50 per meal is exempt.
- Gift Vouchers: Up to ₹5,000 per year is tax-free.
- Learning & Development: Reimbursements for certifications or books are usually fully exempt as they are “business expenses.”
3. Review Your “Basic” vs “Allowances”
With the New Labour Codes likely being implemented in 2026, your Basic Salary must be at least 50% of your CTC. This increases your PF contribution.
- The Catch: While a higher PF reduces your take-home, it also lowers your taxable income. If you are hovering around ₹12.8 lakh, a higher PF contribution could push you back into the “Zero-Tax” zone.
Common Myth vs. Reality
| Myth | Reality |
| “I can still use HRA and 80C to reach the ₹12L limit.” | False. These are only available in the Old Regime. The ₹12L tax-free limit only applies to the New Tax Regime. |
| “If I earn ₹12,00,001, I only pay tax on that ₹1.” | The 2026 Trap: No. If you cross the limit, you lose the ₹60,000 rebate entirely. You will pay tax on the full amount (approx. ₹60,000+). |
| “Restructuring salary is only for high earners.” | Reality: It is most critical for those earning between ₹12.75L and ₹13.5L to avoid the “Tax Cliff.” |
Why the “Marginal Relief” matters in 2026
If you just miss the limit (e.g., you earn ₹12.1 lakh), the 2026 rules provide Marginal Relief. This ensures that the tax you pay isn’t higher than the extra income you earned over ₹12 lakh. However, this is a complex calculation. It is always safer to use the NPS or PF route to stay safely below the threshold.
Pro-Tip: Check your Form 12BB in February. If your projected income is ₹12.8 lakh, you are about to pay ₹70,000 in tax. Investing just ₹10,000 more in NPS via your employer could save you that entire ₹70,000.
Actionable Summary
- Calculate your “New Taxable Income”: Gross Salary minus ₹75,000 (Standard Deduction) minus Employer NPS.
- Target the ₹12 Lakh Mark: If you are slightly over, use Corporate NPS to dip below.
- Talk to HR now: Payroll structures for the new Financial Year (starting April 1st) are often locked in by mid-March.
People Also Ask (FAQs)
1. Is the ₹12 lakh limit applicable for the Old Tax Regime?
No. The Old Regime still has an effective tax-free limit of ₹5 lakh (or up to ₹7-8 lakh with heavy 80C/24b deductions).
2. What happens if I have income from other sources like Rent or Interest?
These are added to your salary. Your Total Taxable Income (Salary + House Property + Other Sources) must be below ₹12 lakh to get the full rebate.
3. Can I claim Home Loan interest in the New Regime in 2026?
Generally, no. You cannot claim interest for a self-occupied property. However, you can set off interest against rental income if the property is “let-out.”
4. Why did the government increase the Standard Deduction to ₹75,000?
To account for inflation and to make the New Tax Regime more attractive than the Old one, which only offers a ₹50,000 deduction.
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