How to Save Income Tax on Rs. 12 Lakh Salary for FY 2025-26

Budget 2025 fundamentally changed the tax calculus for salaries around Rs. 12 lakh — what previously required careful deduction planning to minimise tax can now, under the new regime, result in genuinely zero tax liability through the enhanced rebate alone. Understanding exactly how this works, and when the old regime still makes sense, helps you choose the right approach for FY 2025-26.

This page covers:

• What changed in FY 2025-26 — standard deduction and Section 87A rebate
• Income tax slabs under the new regime for FY 2025-26
• Old vs. new regime comparison
• Worked examples showing zero tax liability
• Deductions available under both regimes
• Which regime is better for a Rs. 12 lakh salary

The financial year 2025-26 has brought meaningful updates for salaried taxpayers earning around Rs. 12 lakh annually. The Union Budget further strengthened the new tax regime, which has been the default option since FY 2023-24, aimed at increasing take-home salary while reducing the need for compulsory tax-saving investments.

Standard deduction increase: Earlier capped at Rs. 50,000, it has now been raised to Rs. 75,000 under the new regime. For an annual salary of Rs. 12 lakh, taxable income automatically reduces to Rs. 11.25 lakh after this deduction.

Section 87A rebate increase: The rebate limit increased substantially from Rs. 25,000 to Rs. 60,000. As a result, resident individuals with taxable income up to Rs. 12.75 lakh can effectively pay no income tax under the new regime, subject to conditions.

Suppose Mr Arun receives an HRA exemption of Rs. 60,000, LTA exemption of Rs. 20,000, pays Rs. 2,400 as professional tax, invests Rs. 1.5 lakh in PPF, pays Rs. 50,000 for senior citizen parents' health insurance, and pays Rs. 25,000 towards education loan interest.

Conclusion: Choosing the new tax regime in this case results in zero tax liability, saving Rs. 84,261.

Choose the old regime if: You invest regularly, pay rent, or have a home loan on a self-occupied property with significant deductions to claim.
 

Choose the new regime if: You have minimal deductions and prefer a hassle-free filing process — the enhanced Section 87A rebate now often makes this the more advantageous option for straightforward salary structures.
 

For those with a home loan, particularly on a self-occupied property, the old regime's Section 24(b) interest deduction (up to Rs. 2 lakh) combined with Section 80C principal repayment can substantially reduce taxable income, worth comparing carefully against the new regime's rebate benefit. Check your eligibility for a home loan from Bajaj Finance, which can support your financial planning while potentially reducing your taxable income under the old regime.

Understanding your specific tax outcome requires plugging in your actual salary components — HRA received, professional tax paid, and any investments already made — rather than relying solely on generic examples. Since the new regime removes the incentive to invest purely for tax-saving purposes, taxpayers choosing this route should evaluate their long-term financial goals independently, treating PPF, ELSS, and insurance decisions as pure wealth-building or protection choices rather than tax strategies. For salaried employees with a home loan, running both regime calculations side-by-side — factoring in actual interest and principal repayment figures — remains the most reliable way to identify genuine savings before filing.

Understanding these enhanced Budget 2025 benefits — the higher standard deduction and expanded Section 87A rebate — allows you to make an informed decision about which tax regime genuinely minimises your liability at the Rs. 12 lakh income level. Bajaj Finance offers home loans from 7.25% p.a.* with amounts up to Rs. 15 Crore* and tenures up to 32 years. Check your eligibility today.