How Salaried Assessees Can Legally Reduce Tax to Nil: A Practical Guide to New vs Old Regime

Salaried individuals often see TDS going out of their salary every month but are not always aware of how to lawfully minimise their income tax outgo. With the introduction of the New Tax Regime as the default option and the continuing availability of the Old Tax Regime, it has become essential for a salaried assessee to understand:

  • How standard deduction works in both regimes
  • How the rebate under Section 87A can ensure zero tax up to a certain income level
  • Which deductions are still allowed in the New Regime
  • Which deductions and exemptions make the Old Regime attractive

This article decodes these provisions in a simple, structured manner, with fresh examples and clear comparisons.

Dual Options for Salaried Assessees: New Regime vs Old Regime

Under the Income Tax Act 1961, a salaried assessee can be taxed under either:

  1. New Tax Regime – This is now the default regime, with lower slab rates but very limited deductions and exemptions.
  2. Old Tax Regime – This continues as an optional regime, retaining popular deductions and exemptions (like Section 80C, HRA, home loan interest, etc.) but with comparatively higher slab rates.

Important: The assessee has to compute tax liability under both regimes (where eligible to choose) and then opt for the one that results in lower tax. Salaried assessees can usually exercise this choice each year while filing their return (subject to applicable rules).

Understanding Standard Deduction for Salaried & Pensioners

What Is Standard Deduction?

Standard deduction is a flat reduction from salary income allowed without any requirement for bills, proofs or investments. Once an assessee has salary (or eligible pension) income, this deduction is automatically claimable, provided the assessee chooses a regime where it is permitted.

Standard Deduction in Both Regimes

  • Under New Tax Regime

    • Standard deduction: Rs. 75,000
    • Available to salaried assessees and eligible pensioners

  • Under Old Tax Regime

    • Standard deduction: Rs. 50,000
    • Also available to salaried assessees and eligible pensioners

Note: Standard deduction is one of the rare benefits that continues even under the New Tax Regime.

This means, from the moment a person starts receiving salary, a chunk of income (Rs. 75,000 under new, Rs. 50,000 under old) is treated as not taxable, simply by virtue of this deduction.

How Much Salary Can Be Tax-Free? Role of Section 87A Rebate

The actual “zero tax income” threshold depends not only on the basic exemption and slab rates, but also on how the rebate under Section 87A operates.

Section 87A under New Tax Regime

Under the New Tax Regime:

  • If total taxable income (after standard deduction and other allowed deductions under the regime)
    is up to Rs. 12,00,000,
  • The assessee is eligible for a rebate up to Rs. 60,000 under Section 87A.
  • This rebate can reduce the entire tax liability to NIL if tax computed is within this rebate limit.

Now factor in the standard deduction of Rs. 75,000:

  • Gross salary up to Rs. 12,75,000
  • Less standard deduction Rs. 75,000
  • Taxable income becomes Rs. 12,00,000,
  • Eligible for full rebate under Section 87A,
  • Resultant tax liability: NIL.

Practical Example under New Regime (Nil Tax up to Rs. 12.75 Lakh)

Consider Mr. Sharma, a salaried assessee drawing a gross salary of Rs. 12,75,000 under the New Regime:

  1. Gross salary: Rs. 12,75,000
  2. Less standard deduction (New Regime): Rs. 75,000
  3. Taxable income: Rs. 12,00,000

Tax on Rs. 12,00,000 is computed as per New Regime slab rates. Suppose:

  • 5% on the portion from Rs. 4,00,000 to Rs. 8,00,000 = Rs. 20,000
  • 10% on the portion from Rs. 8,00,000 to Rs. 12,00,000 = Rs. 40,000

Total tax before rebate = Rs. 60,000.

Since taxable income does not exceed Rs. 12,00,000, Section 87A rebate of Rs. 60,000 is available, wiping out the entire tax liability.

Result: Mr. Sharma’s final tax is NIL, and the entire Rs. 12,75,000 gross salary is effectively tax-free under the New Tax Regime.

Marginal Relief When Income Slightly Exceeds Rs. 12 Lakh (New Regime)