New Income Tax Act 2025: ₹12 Lakh Zero Tax, 8-City HRA, and What Changed from April 2026

India's new Income Tax Act 2025 took effect on April 1, 2026, replacing the Income Tax Act of 1961 that had governed taxation in India for over 60 years. This isn't just a rebrand — the new Act simplifies the structure, updates language, and introduces several substantive changes to thresholds and exemptions that affect the tax liability of millions of salaried and self-employed individuals.

The headline change: under the new tax regime, income up to ₹12 lakh is effectively zero-tax. For salaried individuals with the standard deduction of ₹75,000, this extends to ₹12.75 lakh. There's no deduction claiming involved — this threshold is built directly into the rebate structure.

But the threshold is only one part of the picture. Several other changes buried in the fine print have a meaningful impact depending on your specific situation.

What actually changed (beyond the headline)

The new Act introduces changes across four areas that affect a large portion of middle-class taxpayers.

The ₹12 lakh zero-tax threshold (new regime). Under Section 87A, the tax rebate has been enhanced so that individuals with net taxable income up to ₹12 lakh pay zero income tax. For salaried employees, the standard deduction of ₹75,000 reduces gross salary to net taxable income — so a gross CTC translating to ₹12.75 lakh after salary-to-taxable conversion effectively pays nil tax. This is a meaningful jump from the previous ₹7 lakh effective threshold.

HRA exemption now applies to 8 cities, not 4. Previously, the 50% HRA exemption (on basic salary) was available only in four metropolitan cities: Delhi, Mumbai, Kolkata, and Chennai. The new Act adds four more: Bengaluru, Hyderabad, Pune, and Ahmedabad. For residents of these cities paying metro-equivalent rents, this expands the HRA exemption available under the old regime — a significant change for salaried employees in the IT, manufacturing, and services sectors.

Senior citizen deduction doubled. The deduction on interest income (Section 80TTB) for senior citizens has been increased from ₹50,000 to ₹1 lakh per year. This benefits retirees holding FDs, savings accounts, and small savings schemes who generate interest income.

Simplified structure for the new regime. The new Act makes the new tax regime the clear default with simplified slabs, while the old regime remains available but requires active opt-in at the time of filing.

The rupee numbers: old regime vs new regime at different incomes

The core decision for most taxpayers remains the same: does your deduction profile justify the old regime? Here's a concrete breakdown.

Scenario 1: ₹10 lakh gross income, salaried, no significant deductions.

New regime: standard deduction ₹75,000 → taxable ₹9.25 lakh → tax approximately ₹52,500 → rebate under 87A → net tax: ₹0 (because taxable income under the ₹12L threshold after rebate)
Old regime: standard deduction ₹50,000 + 80C ₹1.5 lakh = taxable ₹8 lakh → tax approximately ₹75,000 → surcharges → net tax approximately ₹78,750
Winner: New regime by a significant margin

Scenario 2: ₹15 lakh gross income, salaried, maximum deductions (80C ₹1.5L + home loan interest ₹2L + HRA ₹1.8L).

New regime: standard deduction ₹75,000 → taxable ₹14.25 lakh → tax approximately ₹1,55,000
Old regime: deductions ₹5.3 lakh (80C + HRA + 80TTA + home loan interest) → taxable ₹9.7 lakh → tax approximately ₹1,17,500
Winner: Old regime by approximately ₹37,500/year

Scenario 3: ₹20 lakh, salaried in Bengaluru, with home loan and NPS.

New regime: taxable ₹19.25 lakh → tax approximately ₹2,55,000
Old regime: with ₹7–8 lakh in total deductions (HRA in Bengaluru now at 50% = potentially ₹3–4L, home loan interest ₹2L, 80C ₹1.5L, NPS 80CCD(1B) ₹50K) → taxable ₹12–13 lakh → tax approximately ₹1,50,000–₹1,65,000
Winner: Old regime can save ₹90,000–₹1,05,000/year

The break-even point — where both regimes produce the same tax — typically falls at ₹3–4 lakh in total deductions for incomes in the ₹12–20 lakh range. The Bengaluru/Pune/Hyderabad/Ahmedabad HRA change specifically pushes more taxpayers in these cities toward the old regime being advantageous, especially if they're paying market rents.

What you should do right now

Step 1: Collect your deduction data. Pull together your actual numbers: rent paid (and any HRA from salary), home loan interest certificate, Section 80C investments (EPF, ELSS, PPF, insurance premiums), and any NPS contributions. Don't estimate — get the actual figures from your employer's Form 16 and loan statements.

Step 2: Run both regimes. Use the Income Tax Calculator to enter your actual CTC, deductions, and HRA situation under both regimes. The difference is often ₹30,000–₹1,50,000 for salaries in the ₹12–25 lakh range — worth 10 minutes of your time.

Step 3: Check if you're in one of the 8 HRA cities. If you live in Bengaluru, Hyderabad, Pune, or Ahmedabad (newly added) and your CTC includes HRA, recalculate your HRA exemption using the expanded 50% rule. If your employer's payroll software hasn't updated to reflect the new city list, your Form 16 may understate your HRA exemption — which you can correct at filing.

Step 4: Decide your regime for FY 2026-27. If you're salaried, inform your employer at the start of the financial year (April). If you missed the April window, you can still switch at the time of filing your ITR — but your employer will have been deducting TDS on the default new regime assumption.

Step 5: Don't over-invest in 80C just to avoid tax. A common mistake: buying insurance or investing in ELSS primarily to claim 80C under the old regime, when the new regime (without claiming deductions) actually results in lower tax. Run the numbers first.

Calculate your tax under both regimes

The Income Tax Calculator supports both the old and new regime calculations, updated for FY 2026-27 rates including the ₹12 lakh threshold and the expanded HRA city list. You can enter your salary, HRA, home loan interest, 80C investments, and NPS contribution — and see the tax payable under each regime side by side.

For salaried employees in the ₹10–20 lakh gross salary range, this calculation typically produces one of three outcomes:

New regime is clearly cheaper (usually when deductions are below ₹2–3 lakh)
Old regime is cheaper by ₹30,000–₹1,50,000 (usually when home loan + HRA + 80C together exceed ₹5 lakh)
The difference is marginal (₹5,000–₹15,000) and complexity of the old regime is not worth it

The calculator is entirely in-browser — your income and deduction details never leave your device, which matters when entering your actual CTC and loan figures.

You can also cross-reference with the Take-Home Salary Calculator to understand how your gross CTC translates to net in-hand pay under each regime — useful for budgeting and knowing what your actual monthly cash flow will be after TDS.

Three mistakes to avoid under the new Act

Mistake 1: Letting your employer default you to new regime without calculating first. If you haven't submitted a regime declaration, TDS is deducted on the new regime by default. For incomes above ₹15 lakh with significant deductions — home loan interest, HRA, full 80C — this means excess TDS is being deducted all year. You get a refund at filing, but you've given the government an interest-free loan for 12 months. Submit the declaration every April before your employer runs the first payroll cycle.

Mistake 2: Assuming the HRA city expansion is already in your payroll software. If you work in Bengaluru, Hyderabad, Pune, or Ahmedabad — the four newly added cities under the new Act — your employer's system may not yet reflect the 50% HRA exemption rule for these cities. Your Form 16 could understate your HRA exemption. You can correct this directly when filing your ITR by computing the actual exemption using the 50% rule and entering it yourself.

Mistake 3: Over-investing in 80C instruments to beat the new regime. A common trap: buying insurance policies or locking money in ELSS purely to claim 80C, when running the actual numbers reveals the new regime (without any of those deductions) results in lower tax. Always run the comparison before committing capital to tax-saving instruments under the old regime.

My Take

The HRA city expansion is the change that will catch the most people off-guard in their FY 2026-27 filings. If you are renting in Bengaluru, Hyderabad, Pune, or Ahmedabad and are on the old regime, you now qualify for the 50% HRA exemption rule — the same as Delhi and Mumbai. Your employer's payroll software may not reflect this correctly yet, and your Form 16 could understate your exemption as a result. The fix is to compute your actual HRA exemption using the 50% rule directly when filing your ITR (under Schedule S, House Rent Allowance section) rather than accepting the Form 16 figure uncritically. If your Form 16 shows 40% and you are now entitled to 50%, the difference — on rent of ₹25,000 per month — is ₹30,000 in additional exemption per year.

The ₹12 lakh zero-tax threshold is real, but it applies only when your total income from all sources does not push you above the rebate limit. Any savings account interest, FD interest, rental income, dividend income, or freelance income adds to your salary and can erode the rebate. Run your complete income picture through the income tax calculator — not just your salary CTC — before concluding that you owe zero tax. A ₹50,000 FD interest receipt from a bank you forgot about is enough to shift some income into a taxable slab. The calculator takes two minutes; the scrutiny notice from missing it takes considerably longer.

Grishma covers Indian markets and personal finance for Stax Tools. She tracks RBI policy, household budgets, and investment math for working Indian families.

Sources & methodology

New Income Tax Act 2025: Ministry of Finance notification, effective April 1, 2026. The Act replaces the Income Tax Act, 1961 (Act No. 43 of 1961) after receiving Presidential assent. Official text available at incometaxindia.gov.in.

₹12 lakh zero-tax threshold: Based on the enhanced Section 87A rebate as notified in the Finance Act 2025. For salaried individuals, the ₹75,000 standard deduction (introduced in the Union Budget 2024-25 and retained) extends the effective nil-tax threshold to ₹12.75 lakh gross salary.

HRA city expansion: The 8-city 50% HRA exemption rule is specified under Section 10(13A) read with Rule 2A of the new Act. The four newly added cities — Bengaluru, Hyderabad, Pune, and Ahmedabad — are notified via CBDT circular.

Senior citizen deduction: Section 80TTB limit doubled from ₹50,000 to ₹1,00,000 per annum for FY 2026-27 onwards.

Tax calculations in this post are illustrative estimates based on the new regime slabs (0% up to ₹4L, 5% ₹4–8L, 10% ₹8–12L, 15% ₹12–16L, 20% ₹16–20L, 25% ₹20–24L, 30% above ₹24L) and old regime slabs as applicable for FY 2026-27. Actual liability will vary based on individual deduction profile. Use the Income Tax e-filing portal for official filing.

The bottom line

The new Income Tax Act 2025 is now live and the ₹12 lakh zero-tax threshold is the most significant direct benefit for middle-income salaried Indians in years. For those with gross income under ₹12.75 lakh, the new regime is almost certainly the right choice — there's little the old regime can do to beat zero tax. For incomes above ₹15 lakh, especially in the newly-added HRA cities (Bengaluru, Pune, Hyderabad, Ahmedabad), the old regime may still save ₹50,000–₹1 lakh annually depending on deductions. Run both numbers before letting your employer default you into one.

→ Calculate your tax under old and new regime — free, in-browser, updated for FY 2026-27.