Money Blog · New tax regime
The ₹12 Lakh Tax Cliff: How Marginal Relief Works in the New Regime
The new tax regime has a sharp edge near ₹12 lakh that confuses a lot of people. Up to ₹12,00,000 of taxable income you pay no income tax at all. One rupee above it, a careless reading of the rebate says you owe ₹60,000. That doesn't happen, because of marginal relief, but the way it works has a consequence worth knowing.
The rebate, in one paragraph
In FY 2026-27 the Section 87A rebate under the new regime is up to ₹60,000 when taxable income is ₹12,00,000 or less. The slab tax at exactly ₹12 lakh is ₹60,000 (nothing up to ₹4 lakh, 5% on the next ₹4 lakh, 10% on the next ₹4 lakh), so the rebate wipes it out. For a salaried person, add the ₹75,000 standard deduction: a salary of ₹12.75 lakh has taxable income of ₹12 lakh.
What marginal relief does just above the limit
Above ₹12 lakh the rebate stops, but the tax payable (before cess) is capped at the amount by which your income exceeds ₹12 lakh. So the first few thousand rupees above the line are taxed almost fully, not ₹60,000 at once. These figures come from the same tax engine that powers the calculators on this site:
| Taxable income | Tax without relief | Tax after relief | With 4% cess |
|---|---|---|---|
| ₹12,00,000 | ₹60,000 | ₹0 | ₹0 |
| ₹12,10,000 | ₹61,500 | ₹10,000 | ₹10,400 |
| ₹12,50,000 | ₹67,500 | ₹50,000 | ₹52,000 |
| ₹12,70,000 | ₹70,500 | ₹70,000 | ₹72,800 |
| ₹12,80,000 | ₹72,000 | ₹72,000 | ₹74,880 |
The catch: a very steep stretch
Between ₹12 lakh and roughly ₹12.7 lakh of taxable income, every extra rupee you earn is taxed at close to 100%, and a little over 100% once cess is added. A ₹10,000 raise that lands in this band increases your tax by about ₹10,400, so your take-home doesn't move. This matters when you are negotiating a salary or choosing between a bonus and a deferred payout, and the band is easy to miss because the headline message is that income up to ₹12 lakh is tax-free.
What to do with this
If your taxable income lands in or just above this band, check whether a deduction that is allowed in the new regime can bring it down. Employer NPS contribution under Section 80CCD(2) is the commonly discussed one, but it depends on how your pay is structured. Also check whether the old regime works out better for you, since it has no such cliff but needs real deductions to compete.
This is general information for FY 2026-27, not tax advice. Rules change at every Budget, so confirm against the current law or with a CA before acting.
Frequently asked questions
Is income up to ₹12 lakh really tax-free in the new regime?
Taxable income up to ₹12,00,000 gets a Section 87A rebate of up to ₹60,000, which cancels the slab tax in full, so the income tax is ₹0. Because the new regime also gives a ₹75,000 standard deduction to salaried people, that corresponds to a salary of about ₹12.75 lakh. Professional tax and PF are separate and still apply.
What happens if my taxable income is ₹12,10,000?
Without marginal relief the slab tax would be ₹61,500. Marginal relief limits the tax to the amount by which you exceed ₹12 lakh, so the tax is ₹10,000, plus 4% cess for ₹10,400 in total.
Until what income does marginal relief help?
Until the tax on the ordinary slabs becomes lower than the amount above ₹12 lakh. With the FY 2026-27 slabs that happens at a taxable income of roughly ₹12.7 lakh, which is a salary of about ₹13.45 lakh after the standard deduction.
How can I reduce taxable income to get under the limit?
In the new regime most deductions are not available. Employer contributions to NPS under Section 80CCD(2) are one that is, up to a limit tied to Basic salary. Whether you can use it depends on how your employer structures pay, so check with your employer or a CA.
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PayClever gives you an informational estimate, not tax, legal, or financial advice — check with a professional before acting on it.