While the new tax regime provides rebate benefits effectively resulting in nil tax liability for resident individuals having taxable income up to Rs. 12 lakh, this relief is not absolute in all cases.
June 9, 2026 17:06 IST
The announcement made in the Union Budget 2025-26 that individuals earning up to Rs 12 lakh a year under the new tax regime can effectively pay zero income tax came as a major relief for millions of taxpayers. But if your annual income is below this threshold, you may be surprised to find that you could still end up with a tax liability.
While the new tax regime provides rebate benefits effectively resulting in nil tax liability for resident individuals having taxable income up to Rs. 12 lakh, this relief is not absolute in all cases. A taxpayer may still end up paying tax despite having a total taxable income below Rs. 12 lakhs, where such income includes components taxable at special rates.
This is because the rebate under section 87A of the Income Tax Act 1961 (renamed as Section 156 under the new Income Tax Act 2025) is generally not available against tax payable on incomes taxed at special rates, such as certain capital gains taxable under sections 111A, 112, etc. or winnings from lotteries and other specified incomes. Accordingly, even if the overall total taxable income remains below Rs. 12 lakhs, the tax attributable to such special rate income may continue to be payable.
For instance, a taxpayer earning salary income within the rebate threshold but also having taxable equity capital gains may not be able to completely eliminate tax liability through the rebate. Therefore, taxpayers should not evaluate taxability merely based on the Rs. 12 lakh threshold but should also assess the nature and composition of income to determine actual eligibility for tax relief.
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How does the rebate under Section 156 work in the new tax regime?
Under the new tax regime, the rebate under Section 156 works as a direct reduction from the income tax payable (before cess), ensuring that eligible resident individuals pay nil tax up to a specified income threshold.
For FY 2025–26 (AY 2026–27), a resident individual opting for the new regime can claim a rebate of up to Rs. 60,000, provided the total taxable income does not exceed Rs. 12 lakhs. This means that even if tax is computed as per slab rates, the rebate reduces the tax liability to zero, to the extent of the tax payable. However, the rebate cannot exceed the actual tax amount.
“Further, the benefit is generally not available against income taxed at special rates as aforementioned. Salaried taxpayers may effectively enjoy zero tax up to Rs. 12.75 lakh (with no income taxable at special tax rates), considering the standard deduction quantum of Rs. 75,000 under the new regime,” says CA (Dr.) Suresh Surana.
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What are the most common mistakes investors make while calculating their tax liability under the new regime?
Investors often make errors while computing their tax liability under the new tax regime due to assumptions carried forward from the old regime or incorrect reporting of income. Some of the most common mistakes include:
Misunderstanding Section 156 rebate eligibility – Taxpayers frequently assume that the rebate automatically applies to all income up to Rs. 12 lakhs. However, income taxable at special rates may not qualify for rebate benefits in the same manner, leading to incorrect tax calculations.
Investors often overlook that equity, mutual fund, property, or other capital gains are taxed separately based on the nature and holding period of the asset and may attract special tax rates distinct from slab rates under the new regime.
Not considering advance tax obligations – Many investors assume tax deducted at source (TDS) is the final tax liability, whereas additional tax may still be payable depending on total income. High-income investors may also miss out on their advance tax requirements, leading to interest implications.
Overlooking set-off and carry-forward rules – Taxpayers may incorrectly adjust losses, especially capital losses, without understanding the restrictions on intra-head and inter-head set-off or the timelines for carry-forward. Further, carry forward of losses is only permitted where the return is filed within the due date u/s 139(1) [except House Property losses], according to Surana.
Choosing the tax regime without comparison – Although the new regime is the default option, taxpayers should compare both regimes before filing, particularly where housing loans or business-related benefits are significant.
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What are the most common reasons taxpayers receive tax notices despite earning below Rs 12 lakh?
Even where a taxpayer’s total taxable income is below Rs. 12 lakh and no tax may ultimately be payable due to rebate benefits under Section 156 in the new tax regime, tax notices can still arise for several procedural or reporting-related reasons. A few of the most common triggers include:
Mismatch in reported income – Differences between income disclosed in the Income Tax Return (ITR) and information available in Form 26AS, Annual Information Statement (AIS), or Taxpayer Information Summary (TIS), such as unreported interest income, dividends, freelance receipts, or capital gains.
Incorrect assumption regarding tax-free income – Many taxpayers assume that income below Rs. 12 lakh is automatically exempt from filing or reporting. However, the rebate under Section 156 is available only after proper computation of taxable income and filing of the return, subject to conditions.
Special rate income not considered – Income taxable at special rates, such as short-term capital gains under section 111A, long-term capital gains, lottery income, or virtual digital asset (crypto) income, may not qualify for rebate relief and could trigger scrutiny if omitted or incorrectly reported, stated Surana.
High-value financial transactions – Significant deposits, property transactions, foreign travel expenses, credit card spends, or investment activity reflected in AIS may prompt automated notices if corresponding income disclosures appear inadequate.
TDS/TCS reconciliation issues – Claiming excess credit for tax deducted at source (TDS) or tax collected at source (TCS), or mismatch in deductor reporting, can also lead to notices.
Disclaimer: This article is for informational purposes only and does not constitute professional tax advice. Tax laws and regimes are subject to frequent changes by the government. Readers should verify details with official Income Tax Department notifications or consult a Chartered Accountant before making any financial decisions.
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This article was first uploaded on June nine, twenty twenty-six, at six minutes past five in the evening.
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