Budget 2026: Income tax rates explained – Who pays zero, Who gets relief, How new IT regime works

Income Tax New Rates: How much income is actually tax-free? What happens if you earn slightly more than Rs 12 lakh? And why does the new tax regime talk about both rebate and marginal relief? As Budget 2026 spells out the rate of income tax in detail, here is a simple explainer that answers the most common income tax questions, with clear examples to show how tax liability is calculated under the new and old regimes.

What is the new tax regime?

The new tax regime provides concessional income tax rates with wider income slabs. However, most deductions and exemptions are not allowed under this regime, except those specifically permitted under the law. The new tax regime is provided under Section 115BAC(1A) of the Income-tax Act, 1961 and Section 202 of the Income-tax Act, 2025.

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What are the income tax rates under the new tax regime?

For Assessment Year 2026-27 and Tax Year 2026-27 onwards, income tax rates under the new regime are as follows:

• Income up to Rs 4,00,000: Nil
• Rs 4,00,001 to Rs 8,00,000: 5 per cent
• Rs 8,00,001 to Rs 12,00,000: 10 per cent
• Rs 12,00,001 to Rs 16,00,000: 15 per cent
• Rs 16,00,001 to Rs 20,00,000: 20 per cent
• Rs 20,00,001 to Rs 24,00,000: 25 per cent
• Above Rs 24,00,000: 30 per cent

These rates apply uniformly under both the Income-tax Act, 1961 and the Income-tax Act, 2025.

Who can opt for the new tax regime?

The new tax regime applies to individuals, Hindu Undivided Families (HUFs), associations of persons (other than co-operative societies), bodies of individuals, and artificial juridical persons.

What is the maximum income on which tax liability is nil?

Under the new tax regime, individual taxpayers with a total income of up to Rs 12 lakh have zero tax liability due to the rebate available. This benefit applies only if the taxpayer files an income tax return.

How does the rebate work in the new regime?

Rebate reduces the tax payable to zero for eligible taxpayers. The maximum rebate available is Rs 60,000. This rebate ensures that individuals with income up to Rs 12 lakh do not pay any income tax under the new regime.

Example:

• If a taxpayer earns Rs 12 lakh in a year, tax as per slab rates is payable. However, the rebate of up to Rs 60,000 reduces the final tax liability to nil.
• Is the standard deduction available under the new regime?
• Yes. A standard deduction of Rs 75,000 is available to salaried taxpayers under the new regime.

Case study:

If a salaried individual earns Rs 12.75 lakh before standard deduction, the taxable income after deduction becomes Rs 12 lakh. As a result, the taxpayer does not pay any income tax under the new regime.

What is marginal relief?

Marginal relief ensures that taxpayers earning slightly more than Rs 12 lakh do not end up paying disproportionately high tax. It limits tax payable to the amount by which income exceeds Rs 12 lakh.

How does marginal relief work?

Marginal relief is available only to resident individuals under the new tax regime.

Example:

• If a person earns Rs 12,10,000:
• Tax as per slab rates works out to Rs 61,500.
• Without relief, tax liability would be higher than the income increase.
• With marginal relief, the tax payable is limited to Rs 10,000, which is the amount exceeding Rs 12 lakh.

More examples of marginal relief:

• Income of Rs 12,25,000: Tax payable Rs 25,000
• Income of Rs 12,50,000: Tax payable Rs 50,000
• Income of Rs 12,70,588: No marginal relief applies
• Marginal relief is available up to a total income of Rs 12,70,588.

Is a rebate available on capital gains or lottery income?

No. Rebate under the new regime is available only on income taxed at slab rates. Income such as capital gains, lottery winnings or other income taxed at special rates is not eligible for rebate.

What is the difference between a rebate and marginal relief?

The rebate applies to taxpayers with income up to Rs 12 lakh and reduces tax liability to zero. Marginal relief applies to those earning slightly above Rs 12 lakh and ensures tax payable does not exceed the income earned over Rs 12 lakh.

What are the income tax rates under the old tax regime?

• Under the old tax regime for FY 2025-26:
• Income up to Rs 2.5 lakh: Nil
• Rs 2.5 lakh to Rs 5 lakh: 5 per cent
• Rs 5 lakh to Rs 10 lakh: 20 per cent
• Above Rs 10 lakh: 30 per cent

Taxpayers opting for the old regime can claim deductions and exemptions as allowed under the Income-tax Act.

Is the standard deduction available under the old regime?

Yes. A standard deduction of Rs 50,000 is available to salaried taxpayers under the old tax regime.

How should taxpayers choose between regimes?

The new tax regime is the default option. Taxpayers who wish to claim deductions and exemptions may opt for the old regime, subject to applicable rules.