Understanding Tax Implications: TDS Exemption on Salaries Up to Rs 12 Lakh and Its Impact on Income Tax 2026

Tax Confusion Looms for High-Income Earners

The new tax regime, introduced in Budget 2025, has raised the Section 87A rebate limit from Rs 7 lakh to Rs 12 lakh, effective from this year. As a result, individuals with a salary close to Rs 12.75 lakh may not have paid a single rupee in Tax Deducted at Source (TDS) so far this year. However, this tax-free period may come to an abrupt end when filing Income Tax Returns (ITRs).

The confusion arises from the difference between TDS on salary and tax on total income. Employers only consider an individual's salary when calculating TDS, estimating the full-year tax based on what they are paying. If the estimated tax amount stays under Rs 12 lakh (including the Rs 75,000 standard deduction), no TDS is deducted. However, the Rs 12 lakh rebate is a total income limit, which includes FD interest, savings account interest, rental income, and other earnings that are not declared to the employer.

When filing ITRs, adding these additional incomes can lead to a sudden spike in tax liability, even if no TDS was deducted on salary. According to Pratibha Gupta, a New Delhi-based Chartered Accountant, this is the biggest challenge in convincing clients whose salary is up to Rs 12 lakh and no TDS has been deducted under the new tax regime.