Overview
How Much Salary Is Tax-Free in FY 2026-27? Standard Deduction, Section 87A Rebate & Best Tax Regime Explained
Many salaried taxpayers are confused about standard deduction, Section 87A rebate, tax-free income limits, and whether to choose the Old or New Tax Regime. Through an engaging Krishna-Arjuna discussion, this article simplifies the tax benefits available to salaried individuals under the Income Tax Act.
It explains how the standard deduction of ₹75,000 under the New Tax Regime and ₹50,000 under the Old Tax Regime reduces taxable salary without requiring any investment proofs. The article also highlights the impact of the Section 87A rebate, which enables salaried taxpayers earning up to ₹12.75 lakh under the New Regime to pay zero income tax and up to ₹5.50 lakh under the Old Regime to enjoy nil tax liability.
Readers will also understand the concept of marginal relief, ensuring that a small increase in income above the rebate threshold does not result in a disproportionately higher tax burden. The article further covers deductions still available under the New Regime, such as employer contributions to NPS under Section 80CCD(2), and discusses major deductions under the Old Regime, including Sections 80C, 80CCD(1B), 80D, home loan interest, HRA, LTA, and education loan benefits.
With practical illustrations comparing both tax regimes, the article helps salaried taxpayers evaluate which option can deliver maximum tax savings based on their income, investments, home loan obligations, and eligible deductions. It serves as a comprehensive guide for making informed tax-planning decisions and minimizing tax liability legally.
Arjuna (Fictional Character): Krishna, salaried taxpayers get confused every year at tax time. Everyone talks about "standard deduction," "rebate," and "tax-free income," but no one explains it simply. How much can a salaried person earn without paying any tax, and which deductions can actually be claimed?
Krishna (Fictional Character): Arjuna, the salaried person is the most honest taxpayer of all, tax is deducted from their salary even before it reaches their hands! Yet many salaried people end up paying more tax than required, simply because they do not know their rights. Under the Income Tax Act, there are two options — the New Tax Regime (the default) and the Old Tax Regime and each gives different benefits.
Arjuna (Fictional Character): Krishna, first what exactly is this "Standard Deduction" that every salaried person keeps talking about?
Krishna (Fictional Character): Arjuna, the Standard Deduction is the simplest and most beautiful benefit for a salaried person. It is a flat deduction from salary income in which no bills, no proofs, and no investment are required. Under the New Tax Regime, it is Rs 75,000, and under the Old Tax Regime it is Rs 50,000. Pensioners too get this benefit against their pension income. So, the very moment a person becomes salaried, Rs 75,000 (or Rs 50,000) is straightaway reduced from taxable income.
Arjuna (Fictional Character): Krishna, now the question every salaried person wants answered is up to what income is NO tax payable at all?
Krishna (Fictional Character): Arjuna, this is where the Rebate under Section 87A works its magic. Under the New Tax Regime, if total taxable income is up to Rs 12,00,000, a rebate of up to Rs 60,000 brings the tax down to NIL; adding the Rs 75,000 standard deduction, a salaried person earning up to Rs 12,75,000 pays zero income tax. Under the Old Tax Regime, if total taxable income is up to Rs 5,00,000, a rebate of up to Rs 12,500 makes the tax NIL; with the Rs 50,000 standard deduction, salary up to Rs 5,50,000 is tax-free and this limit can be pushed much higher by claiming deductions like 80C, 80D and home loan interest.
For Example: Now take Mr. A, a salaried employee with a gross salary of Rs 12,75,000. After reducing the Rs 75,000 standard deduction, the taxable income is Rs 12,00,000. The tax on this works out to Rs 60,000 i.e., 5% on the Rs 4–8 lakh slab (Rs 20,000) plus 10% on the Rs 8–12 lakh slab (Rs 40,000). But the Section 87A rebate of Rs 60,000 wipes this out completely, so Mr. A's final tax is NIL. He takes home the entire Rs 12.75 lakh salary without paying a single rupee of income tax!
Arjuna (Fictional Character): Krishna, but what if someone's income is just slightly above Rs 12 lakh? Does that person suddenly get hit with a huge tax bill?
Krishna (Fictional Character): Arjuna, this is a very common fear, but the law is fair here. The government gives "Marginal Relief." If income crosses Rs 12,00,000 by only a small margin, the tax cannot exceed the amount by which income has crossed Rs 12,00,000. For example, if taxable income after standard deduction is Rs 12,10,000, the income above Rs 12 lakh is only Rs 10,000 so the tax is restricted to roughly Rs 10,000 (plus cess), not the full slab tax of about Rs 61,500. This ensures a taxpayer earning just Rs 1 more does not suddenly lose Rs 60,000.
Arjuna (Fictional Character): Krishna, in the New Tax Regime most deductions are gone. Is there anything a salaried person can still claim, apart from the standard deduction?
Krishna (Fictional Character): Arjuna, yes, the New Regime is not entirely empty! A salaried person can still claim the employer's contribution to NPS under Section 80CCD(2), up to 14% of salary (Basic + DA); this is a powerful benefit, because whatever the employer contributes to the employee's NPS is deducted from taxable income even in the New Regime. A contribution to the Agniveer Corpus Fund under Section 80CCH is also allowed, along with certain specified allowances such as transport allowance for differently abled employees and conveyance incurred for official duty.
Arjuna (Fictional Character): Krishna, and which deductions make the Old Tax Regime worthwhile?
Krishna (Fictional Character): Arjuna, the Old Regime rewards those who invest and spend wisely. Its major deductions for a salaried person are:
- Section 80C - up to Rs 1,50,000: EPF, PPF, ELSS mutual funds, life insurance premium, principal repayment of home loan, children's tuition fees, 5-year tax-saving FD, NSC and Sukanya Samriddhi.
- Section 80CCD(1B) - an extra Rs 50,000 for investment in NPS, over and above the 80C limit.
- Section 80D - health insurance: up to Rs 25,000 for self and family, plus up to Rs 50,000 for senior-citizen parents.
- Home Loan Interest (Section 24b) - up to Rs 2,00,000 on a self-occupied house.
- HRA and LTA: House Rent Allowance for those living in rented homes, and Leave Travel Allowance for domestic travel.
- Sections 80TTA / 80TTB and 80E: savings-bank interest up to Rs 10,000 (Rs 50,000 for senior citizens), and full interest on an education loan.
A salaried person claiming all of these can make even Rs 10–12 lakh of income highly tax-efficient under the Old Regime.
Arjuna (Fictional Character): Krishna, so how does a salaried person decide whether New Regime or Old Regime should be opted?
Krishna (Fictional Character): Arjuna, the golden rule is simple. If the taxpayer's total deductions and exemptions are LOW, the New Regime is better the Rs 75,000 standard deduction and zero tax up to Rs 12.75 lakh are very hard to beat. But if the deductions are HIGH a home loan, large insurance premiums, rent paid (HRA) and full 80C investment then both regimes should be computed, and the Old Regime may save more. Consider Mr. B, with a gross salary of Rs 18,00,000. Under the New Regime, after only the Rs 75,000 standard deduction his taxable income is Rs 17,25,000, and the tax (with 4% Health and Education Cess) comes to about Rs 1,50,800. Under the Old Regime, suppose he claims the Rs 50,000 standard deduction, Rs 1,50,000 under 80C, Rs 50,000 under 80CCD(1B), Rs 25,000 under 80D and Rs 2,00,000 of home-loan interest deductions of Rs 4,75,000 in all. His taxable income then falls to Rs 13,25,000, but the tax (with cess) is about Rs 2,18,400. So here the New Regime saves Mr. B nearly Rs 67,600. However, if Mr. B also claimed a large HRA living on high rent in a metro the Old Regime figure could drop below the New Regime. That is why every salaried taxpayer must run both calculations before choosing.
Arjuna (Fictional Character): Krishna, what should salaried taxpayers finally learn from all this?
Krishna (Fictional Character): Arjuna, every salaried taxpayer should remember that a rupee saved through a legitimate deduction is a rupee earned. Both regimes should be compared every year, investment proofs should be kept ready, and the return must be filed on time. A taxpayer should not invest only to save tax; investments should serve real financial goals, with the tax saving as a welcome bonus.
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