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Tax‐Free Income up to ₹12.75 Lakh! Understanding the New Tax Regime (AY 2026–27) for Salaried Individuals

The New Tax Regime under India’s Income Tax Act has been significantly revamped for the Assessment Year (AY) 2026–27. These changes – announced in the Union Budget 2025 – aim to simplify taxes and put more money in the hands of salaried taxpayers. Notably, under the new regime you can now have effective tax-free income up to ₹12.75 lakh (for salaried persons, after standard deduction). This article provides a clear overview of the new tax slabs and the limited deductions/exemptions available to salaried individuals under the new system, helping you optimize your tax filing.

New Tax Regime at a Glance (AY 2026–27)

Under the new regime for FY 2025–26 (AY 2026–27), income tax slabs have been widened and rates reduced. The basic tax exemption threshold has increased from ₹3 lakh to ₹4 lakh, and a higher rebate now ensures no tax is payable on incomes up to ₹12 lakh (₹12.75 lakh for salaried taxpayers accounting for standard deduction). The latest slab structure is as follows. 

• Up to ₹4,00,000 – Nil (0% tax)
• ₹4,00,001 to ₹8,00,000 – 5%
• ₹8,00,001 to ₹12,00,000 – 10%
• ₹12,00,001 to ₹16,00,000 – 15%
• ₹16,00,001 to ₹20,00,000 – 20%
• ₹20,00,001 to ₹24,00,000 – 25%
• Above ₹24,00,000 – 30%

For example, a salaried individual earning ₹12 lakh would owe zero tax under the new regime after factoring in the rebate (and standard deduction), whereas previously tax would start beyond ₹7 lakh. The rebate under Section 87A has been increased to ₹60,000, which, combined with the new slabs, eliminates tax on income up to ₹12 lakh. Salaried employees further benefit from a ₹75,000 standard deduction, effectively pushing the no-tax threshold to ₹12.75 lakh. These changes make the new regime very attractive for middle-class earners, offering substantial tax relief. 

(Note: Surcharge rates remain unchanged under the new regime for AY 2026–27, and the new regime continues to be the default tax system unless one opts out.)

Deductions and Exemptions Allowed in the New Regime

One key feature of the new tax regime is that most traditional tax breaks are not available. Taxpayers forego nearly all Chapter VI-A deductions and many Section 10 exemptions (for instance, Section 80C investments, 80D medical insurance, House Rent Allowance (HRA), Leave Travel Allowance (LTA), etc., cannot be claimed under the new system). In return, the new regime offers lower tax rates and a simpler filing process. However, there are still a handful of deductions and exemptions that you can avail as a salaried individual in AY 2026–27 under the new regime. These include:

• Standard Deduction – ₹75,000: Salaried employees (and pensioners) are entitled to a flat ₹75,000 deduction from salary income even in the new regime. This is higher than the ₹50,000 standard deduction in the old system, providing additional relief to salary earners. The standard deduction is automatically applied to your salary income and reduces your taxable salary by ₹75,000.
• Employer’s NPS Contribution (Sec 80CCD(2)): If your employer contributes to your National Pension System (NPS) Tier-I account, that contribution is fully exempt under the new regime (up to 10% of your salary for private sector employees, or 14% for government employees). In other words, you do not pay tax on the employer’s NPS contribution, subject to the specified limit, just as in the old regime. This can substantially lower your taxable income if your employer offers NPS benefits.
• Employer’s Provident Fund Contribution: Contributions made by your employer to recognized provident funds (such as EPF) also remain tax-free up to the statutory limit (generally 12% of your basic salary). The new regime has not changed the tax-exempt status of employer PF contributions – these continue to be non-taxable as a perquisite for the employee.
• Retirement Benefits (Exemptions on Gratuity, Leave Encashment, etc.): Amounts received by an employee as gratuity on retirement or as leave encashment at the time of retirement continue to be exempt from tax under the new regime (subject to the prevailing limits under the law). Similarly, amounts received under voluntary retirement schemes (VRS) and commuted pension remain tax-free up to their respective limits, as these exemptions under Section 10 are preserved in the new regime. This ensures that long-term end-of-service benefits for salaried individuals are not taxed.
• Agniveer Fund Contributions (Sec 80CCH): For individuals enrolled in the armed forces Agnipath Scheme (Agniveers), the new regime allows full deduction for contributions made to the Agniveer Corpus Fund, under Section 80CCH. Both the Agniveer’s own contributions and the matching contribution by the Central Government to the fund are deductible. This provision is designed to ensure that Agniveer personnel do not lose out on tax benefits for investing in their service fund, even under the new tax structure.
• Interest on Home Loan for Let-Out Property: The interest paid on a housing loan for a rented/let-out house property remains deductible without any upper limit under the new regime. You can set off the entire interest against the rental income from that property when calculating income from house property (note that for a self-occupied home, the usual ₹2 lakh interest deduction is not available in the new regime). This means landlords can still claim full interest expense and reduce their taxable rental income, just as before. (Any loss from house property can be carried forward as per existing rules, although it cannot be set off against other income in the same year under the new regime.)
• Certain Allowances for Official or Personal Circumstances: A few special allowances paid to employees remain tax-exempt in the new regime, offering some relief for specific expenses. Notable examples are:
  • Transfer Allowance / Relocation Expenses: If you relocate for work, any allowance or reimbursement from your employer for moving, travel, and related transition expenses is tax-free to the extent of actual costs.
  • Conveyance Allowance for Work Travel: If your job requires you to travel and you receive a conveyance or transport allowance (and you do not have a company-provided vehicle), such an allowance remains exempt when used for official duties. This covers typical work travel costs and daily conveyance needed for your employment.
  • Transport Allowance for Disabled Employees: Employees with disabilities continue to get a special transport allowance which is fully exempt up to the prescribed limit (this was ₹3,200 per month in earlier rules). This benefit for differently-abled employees is preserved under the new regime to support their mobility needs.
  • Daily Allowance on Tour: Any daily allowance or per diem given to meet ordinary daily expenses during outstation work travel is non-taxable (as long as it’s for official work travel).
  • Official Perquisites: Perquisites provided purely for official purposes – for example, a laptop or mobile phone for work – remain non-taxable to the employee. These business-use perquisites are excluded from the employee’s income both in old and new regimes.

Table: Key Deductions/Exemptions Allowed for Salaried Taxpayers under New Regime (AY 2026–27)

As shown above, while the new tax regime eliminates most deductions, it does retain a short list of tax concessions for salaried individuals. The standard deduction and employer’s NPS/PF contributions are automatically accounted for in Form 16/tax computation, so be sure to claim these in your tax return. If you have a let-out property, continue to report the interest on home loan to avail the deduction. Also, make use of any eligible allowances – for instance, submit your relocation or travel expense proofs to your employer so that those reimbursements stay tax-free.

Professional, Fact-Based Guidance

The New Tax Regime AY 2026–27 is designed to be simple and taxpayer-friendly, with lower rates and straightforward provisions. By knowing the current slab rates and the limited deductions/exemptions available, salaried taxpayers can make informed decisions to optimize their tax liability. Always refer to official resources like CBDT circulars or Ministry of Finance notifications for the latest updates. According to the Ministry’s release, the new tax structure is expected to substantially reduce the tax burden for the middle class, leaving more disposable income in their hands. With the information provided above – backed by the latest Finance Act provisions and CBDT/Income Tax Department guidelines – you can confidently navigate the new regime and ensure you’re taking full advantage of the relief it offers, all while staying compliant and accurate in your tax filing.