Every year brings a fresh round of "is my income tax-free" confusion, and 2026 adds a new layer: the Income-tax Act, 2025 has replaced the 1961 Act from FY 2026-27, renaming familiar terms and renumbering familiar sections. The good news — the actual tax-free limits and exemptions taxpayers rely on haven't changed. This guide breaks down exactly how much income is tax-free in India right now, and which income types stay exempt no matter how much you earn.
What Changed for FY 2026-27: The Income-tax Act, 2025
The Income-tax Act, 2025 came into force on 1 April 2026, replacing the Income-tax Act, 1961. For everyday taxpayers, three things are worth knowing:
- "Tax Year" replaces "Assessment Year" and "Previous Year." FY 2026-27 is now simply Tax Year 2026-27.
- Section 87A is now Section 156. The rebate that makes income up to ₹12 lakh tax-free under the new regime is unchanged in substance — only the section number moved.
- No change to tax-free limits, slab rates, or exemptions. The restructuring is largely about renumbering and simplification, not new tax burdens.
Tax-Free Income Limit: New Regime vs Old Regime
| Regime | Rebate Section | Tax-Free Up To | Max Rebate | Effective Limit (Salaried) |
|---|---|---|---|---|
| New Tax Regime (default) | Sec. 156 (earlier 87A) | ₹12,00,000 | ₹60,000 | ₹12,75,000 |
| Old Tax Regime | Sec. 156 (earlier 87A) | ₹5,00,000 | ₹12,500 | ₹5,00,000 |
The ₹12 lakh figure is your taxable income (after deductions), not your gross salary — and the rebate doesn't apply to income taxed at special rates, such as short-term or long-term capital gains on listed equity. It's also available only to resident individuals — NRIs, HUFs, firms, and companies can't claim it. Cross above ₹12 lakh even slightly, and marginal relief kicks in so your extra tax never exceeds your extra income.
For a full breakdown of how the two regimes compare on your specific income, see our guide on old vs new tax regime savings and Section 87A/156 rebate rules.
15 Types of Income That Are Tax-Free in India (2026)
Beyond the ₹12 lakh rebate, the Act carves out specific incomes as exempt entirely — you don't pay tax on these even if your total income runs into crores. Here's the full list:
| Income Type | Exemption Limit / Condition |
|---|---|
| Agricultural income | Fully exempt on income from Indian farmland; partial integration applies if net agri income exceeds ₹5,000 and non-agri income exceeds the basic exemption limit |
| PPF interest & maturity | Fully exempt, no upper cap (EEE status); ₹1.5 lakh/year contribution deduction available only under the old regime |
| EPF interest & withdrawal | Tax-free after 5 years of continuous service; interest on annual contributions above ₹2.5 lakh (₹5 lakh with no employer share) is taxable |
| Sukanya Samriddhi Yojana | Fully exempt (EEE status) |
| Gratuity — government employees | Fully exempt |
| Gratuity — private sector | Exempt up to ₹20 lakh (least of actual gratuity, ₹20 lakh, or the statutory formula amount) |
| Leave encashment — government employees | Fully exempt on retirement |
| Leave encashment — private sector | Exempt up to ₹25 lakh lifetime limit, subject to formula-based conditions |
| Life insurance maturity proceeds | Exempt if annual premium doesn't exceed the prescribed % of sum assured (Sec. 10(10D) equivalent) |
| LTCG on listed equity / equity mutual funds | Exempt up to ₹1.25 lakh/year; gains above that taxed at 12.5% without indexation |
| Gifts from relatives, on marriage, or inheritance | Fully exempt, no monetary cap |
| Gifts from non-relatives | Exempt up to ₹50,000/year in aggregate; beyond that, the full amount becomes taxable |
| Scholarships | Fully exempt when granted to meet education costs |
| Share of income from an HUF | Fully exempt in the hands of the member, since the HUF is taxed separately |
| Share of profit from a partnership firm / LLP | Fully exempt for the partner (salary or interest on capital from the firm is still taxable) |
A note on savings account interest
Savings bank interest isn't fully tax-free — it's a deduction, not an exemption. Under the old regime, up to ₹10,000/year (₹50,000 for senior citizens) can be deducted under Section 80TTA/80TTB. The new regime doesn't allow this deduction at all, so treat this one differently from the exemptions above.
Gratuity and Leave Encashment: How the Limits Actually Work
These two trip up more taxpayers than any other item on the list, because the exemption isn't a flat number — it's the least of several calculated amounts:
- Gratuity (private sector, covered under the Payment of Gratuity Act): the least of the actual gratuity received, ₹20 lakh, or 15 days' salary for each completed year of service.
- Leave encashment (private sector, on retirement): the least of ₹25 lakh, the actual amount received, the cash equivalent of unused leave (based on your last 10 months' average salary), or 10 months' average salary itself.
Leave encashed during service (not at retirement) is fully taxable in both sectors — only encashment at retirement, resignation, or termination qualifies for exemption. See our detailed breakdowns on leave encashment taxability and life insurance proceeds taxability.
Do You Still Need to File ITR If Your Income Is Tax-Free?
Yes, in most cases. The Section 156 rebate reduces your tax to zero, but it doesn't remove your obligation to file — if your gross income before deductions exceeds the basic exemption threshold, or you meet other specified conditions (foreign travel spend, high electricity bills, TDS deducted, etc.), you must still file. Exempt-category income like agricultural earnings, PPF interest, or HUF share should also be disclosed in the relevant ITR schedule (Schedule EI), even though no tax applies — skipping this can trigger a mismatch notice against your AIS/Form 26AS.
Also worth reading: Section 80C & 80D deductions for AY 2026-27, tax-saving options under the new regime, and key changes under the Income-tax Act, 2025.
Frequently Asked Questions
Is ₹12 lakh income really tax-free in India in 2026?
Yes, for resident individuals opting for the new tax regime with taxable income up to ₹12,00,000, the Section 156 rebate brings tax liability to zero. This excludes income taxed at special rates, like listed-equity capital gains.
What's the tax-free limit for salaried employees in FY 2026-27?
₹12,75,000, once you add the ₹75,000 standard deduction to the ₹12,00,000 rebate threshold under the new regime.
Is agricultural income completely tax-free regardless of amount?
It's exempt from direct tax, but if your net agricultural income exceeds ₹5,000 and you also have non-agricultural income above the basic exemption limit, agricultural income is added only to determine your slab rate — not taxed itself.
How much gratuity is tax-free for private-sector employees?
Up to ₹20 lakh, subject to the statutory formula — whichever of the three prescribed amounts is lowest.
What is Section 156 of the Income-tax Act, 2025?
It's the renumbered version of the familiar Section 87A rebate from the 1961 Act, applicable from Tax Year 2026-27 onward. The rebate amount and income thresholds are unchanged — only the citation is new.
The Bottom Line
Tax-free doesn't mean tax-invisible. Whether it's the ₹12 lakh rebate under the new regime or a standalone exemption like gratuity or agricultural income, most of these still need to be reported correctly in your ITR. Getting the classification wrong — claiming an exemption that doesn't apply, or missing one that does — is one of the most common reasons taxpayers get a notice.
