Rise in Zero-Tax ITRs

Rise in Zero-Tax ITRs

More than 60% of all income tax returns filed in India for Assessment Year 2024-25 reported zero net tax payable — and that share has continued to climb through AY 2025-26 and AY 2026-27. Three interlocking policy moves explain the surge: the Section 87A rebate (₹25,000 for AY 2025-26; ₹60,000 for AY 2026-27), the ₹75,000 standard deduction for salaried taxpayers, and progressively lower slabs under the new tax regime. If your income falls below the threshold, you owe the government nothing. You still need to file. Here is exactly why — and how.

Why More Than Half of India's ITR Filers Now Pay Zero Tax

The rise in zero-tax ITRs is not accidental. It is the direct outcome of a deliberate policy arc: widen the formal tax base by incentivising low- and middle-income earners to file, while shielding them from actual liability through targeted rebates and deductions. The government wants the data, the compliance habit, and the future taxpayer — and it is willing to forgo revenue in the near term to get all three.

Three data points frame the scale. For AY 2024-25, more than 60 million out of approximately 93 million total ITR filers reported zero net tax. For AY 2025-26 — following the Budget 2024 expansion of the standard deduction from ₹50,000 to ₹75,000 — the zero-tax share rose further. For AY 2026-27, where Budget 2025 raised the Section 87A rebate ceiling to ₹12 lakh (effectively ₹12.75 lakh for salaried employees), the proportion of zero-tax filers is projected to hit an even higher peak.

A second force is also at work: the Annual Information Statement (AIS) now captures far more income streams than Form 26AS once did. Bank interest, dividends, securities transactions, rent receipts, FD maturities — all flow into AIS in real time. When filers spot Tax Deducted at Source (TDS) deducted against these streams in their AIS, they file an ITR to reclaim it — even if their total income remains comfortably below the taxable threshold.

The Section 87A Rebate: Mechanics and What Changed Year by Year

Section 87A of the Income-tax Act 1961 provides a rebate applied directly against computed tax liability. It is not a deduction from income — it eliminates the tax you owe, provided your total income (net of any eligible deductions) remains within the prescribed ceiling. Understanding it year by year is essential, because the ceiling changed dramatically between AY 2025-26 and AY 2026-27.

AY 2025-26: The ₹7 Lakh / ₹7.75 Lakh Baseline

Under the new tax regime for FY 2024-25 (AY 2025-26), the parameters were:

• Basic exemption: ₹3,00,000
• Section 87A rebate: ₹25,000, available if total income ≤ ₹7,00,000
• Standard deduction (salaried / pensioners): ₹75,000

Tax computation on ₹7,00,000 under new regime slabs:

A salaried employee with gross salary of ₹7,75,000 claims ₹75,000 standard deduction, arrives at ₹7,00,000 net income, and pays zero tax. The ₹7.75 lakh effective zero-tax salary cap became the most-searched income threshold in India through this period — and it remains a key benchmark because AY 2025-26 returns continue to be the latest filed-and-assessed returns for which refund data is publicly discussed.

AY 2026-27: The Jump to ₹12 Lakh / ₹12.75 Lakh

Budget 2025 (Finance Act 2025) made a far larger structural shift for FY 2025-26 (AY 2026-27):

• Basic exemption under new regime: ₹4,00,000 (up from ₹3,00,000)
• Section 87A rebate: ₹60,000, available if total income ≤ ₹12,00,000
• Standard deduction: ₹75,000 (unchanged)
• New slabs: 4–8L @ 5% | 8–12L @ 10% | 12–16L @ 15% | 16–20L @ 20% | 20–24L @ 25% | above 24L @ 30%

Tax computation on ₹12,00,000:

A salaried employee earning ₹12,75,000 gross claims ₹75,000 standard deduction, nets ₹12,00,000, and owes zero. The effective zero-tax salary threshold doubled overnight — one of the most significant individual tax changes in decades.

AY 2027-28: The Current Financial Year Position

Union Budget 2026 reaffirmed the new regime's rebate structure without rolling back any Budget 2025 gains. For FY 2026-27 (AY 2027-28), the effective zero-tax ceiling under the new regime remains at ₹12 lakh net (₹12.75 lakh gross salary), as notified. The old regime's Section 87A rebate — capped at ₹12,500 for income up to ₹5 lakh — remains unchanged and significantly less generous, making the new regime the default optimal choice for most earners below ₹13 lakh.

Who Qualifies to File a Zero-Tax ITR?

Zero-tax status is not limited to salaried employees. These categories routinely arrive at nil tax payable for AY 2026-27:

• Salaried individuals and pensioners whose gross income before the standard deduction does not exceed ₹12,75,000 under the new regime.
• Freelancers and consultants under Section 44ADA (presumptive taxation): if gross professional receipts are ₹75 lakh or less, deemed income is 50% of receipts. If that deemed figure stays ≤ ₹12 lakh, Section 87A wipes out the tax entirely.
• Small landlords whose net annual value, after the flat 30% deduction under Section 24(a) and home loan interest under Section 24(b) in the old regime, falls within the exemption-plus-rebate band.
• Senior citizens aged 60 and above: under the new regime, the same ₹12 lakh ceiling applies. Additionally, seniors are exempt from advance tax liability if they have no business or professional income (Section 207 — a commonly missed exemption).
• Students, homemakers, and occasional earners who received TDS on FD interest (Section 194A), dividends (Section 194), or consultancy fees (Section 194J), and whose total income remains below the rebate threshold.

Worked Example: Zero Tax Across Three Real Income Profiles

Case 1 — Mid-Level Salaried Employee (AY 2026-27, New Regime)

Priya is an IT professional. Her employer has deducted ₹28,000 TDS during FY 2025-26.

Priya files ITR-1 by 31 July 2026, e-verifies within 30 days, and receives her ₹28,000 refund. If she had not filed, that money would remain with the Income Tax Department indefinitely.

Case 2 — Freelance Professional Under Section 44ADA (AY 2026-27)

Rahul is a freelance graphic designer. Gross professional receipts for FY 2025-26: ₹18,00,000. He opts for presumptive taxation under Section 44ADA.

Rahul files ITR-4 (Sugam) — not ITR-1. His gross receipts of ₹18 lakh make him ineligible for ITR-1, even though his tax liability is zero.

Case 3 — The Cliff: Income Just Above ₹12 Lakh

Anjali's total income for AY 2026-27 is ₹12,10,000 under the new regime (post standard deduction).

Just ₹10,000 above the ₹12 lakh ceiling costs Anjali ₹10,400 in tax. She should check whether her employer's National Pension System (NPS) contribution under Section 80CCD(2) — deductible even under the new regime, up to 10% of salary for private sector employees — can bring her net income to ₹12 lakh or below.

Five Reasons You Must Still File Even When No Tax Is Due

The single most expensive mistake a zero-tax filer makes is deciding not to file at all because "no tax is owed." Here is precisely what you lose — or risk — if you skip the ITR.

1. Your TDS Refund Stays With the Government

TDS deducted by employers, banks, tenants, and clients sits credited against your tax liability. If your tax is zero but TDS was deducted, only a filed ITR triggers the refund mechanism. There is no automatic reversion. For AY 2026-27, with TDS rates on fixed deposit interest (Section 194A), professional fees (Section 194J), and rent (Section 194-IB) unchanged, many thousands of zero-tax filers have refunds accumulating in the Income Tax Department's accounts simply because they did not file.

2. You Need an ITR Acknowledgement for Life Events

Visa embassies — particularly for the US, UK, Canada, and Schengen area — now routinely request three years of ITR acknowledgements (ITR-V) as evidence of financial standing. So do banks for home loans above ₹40 lakh, credit card limit upgrades, and working capital loan applications. A nil-tax ITR is a valid ITR. No filing leaves you without documentation at the moment you need it most — and there is no way to retroactively fill the gap once a visa appointment or loan deadline has passed.

3. Capital and Business Losses Can Only Be Carried Forward If Filed On Time

If you suffered a loss on listed shares, equity mutual funds, or futures and options during FY 2025-26, you can carry it forward for up to eight assessment years under Section 74 (capital losses) or Section 72 (business losses). But the law is unambiguous: carry-forward is only available if you file the ITR on or before the original due date — 31 July 2026 for AY 2026-27. A belated return filed after 31 July forfeits this right permanently for that year. For a zero-tax filer who also holds equities or runs a side business, missing the deadline is an irreversible financial cost.

4. Schedule FA: Foreign Assets Cannot Be Hidden Behind Zero Tax

If you hold any foreign asset — a bank account, life insurance policy, equity stake, immovable property, trust interest, or even mere signing authority over a foreign account — you must complete Schedule FA (Foreign Assets) in your ITR. This obligation exists regardless of whether your total income is zero and your tax payable is zero. The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act 2015 prescribes a penalty of up to ₹10 lakh per year per undisclosed foreign asset. "No tax was due" is explicitly not a defence under this law. Even a foreign savings account with a nil balance must be disclosed if you held or operated it at any point during the year.

5. Section 139(1) Seventh Proviso — Mandatory Filing Triggers

Even if your income is entirely below the basic exemption limit, you are statutorily required to file an ITR under the seventh proviso to Section 139(1) if you crossed any of these high-value thresholds during FY 2025-26:

• Deposited more than ₹1 crore in one or more current accounts with a bank or co-operative bank
• Incurred expenditure of more than ₹2 lakh on foreign travel for yourself or any other person
• Incurred expenditure of more than ₹1 lakh on electricity consumption in aggregate
• Business sales or turnover exceeding ₹60 lakh, or professional receipts exceeding ₹10 lakh
• Aggregate TDS and TCS deducted and credited is ₹25,000 or more (₹50,000 or more for senior citizens)

These triggers are drawn directly from your AIS. Crossing any one of them and not filing can attract a reopening notice under Section 148A.

Step-by-Step: How to File a Zero-Tax ITR for AY 2026-27

The mechanics of filing a nil-tax return are identical to filing a tax-payable one. Follow this sequence:

1. Select the correct ITR form.
2. ITR-1 (Sahaj): Salary, one house property, other sources (interest, dividends). Total income ≤ ₹50 lakh. No capital gains.
3. ITR-2: Capital gains (LTCG or STCG from shares, mutual funds, or property), or more than one house property, or foreign income.
4. ITR-3: Business or professional income, not under presumptive taxation.
5. ITR-4 (Sugam): Presumptive income under Sections 44AD, 44ADA, or 44AE. Total income ≤ ₹50 lakh.

1. Log in at [incometax.gov.in](https://www.incometax.gov.in) using your PAN credentials. Navigate to e-File → Income Tax Returns → File Income Tax Return.

1. Review your AIS and Tax Information Summary (TIS). Go to Services → Annual Information Statement. Match every income entry — salary, FD interest, dividends, securities transactions, rental receipts — against your own records. Raise a dispute for any entry that is incorrect before you file. An uncorrected AIS entry that contradicts your ITR triggers an automatic mismatch adjustment notice under Section 143(1)(a).

1. Pre-fill and verify. Most ITR forms auto-populate from AIS, employer TDS returns, and Form 26AS. Cross-check the gross salary figure — employers sometimes report a post-exemption number; the ITR requires gross salary before Section 10 exemptions.

1. Confirm TDS in Form 26AS matches Schedule TDS in the ITR. A mismatch — even a ₹5 discrepancy — delays your refund and generates automated communications. Verify every deductor's TAN, the amount deducted, and the quarter of deduction.

1. Verify that Section 87A rebate is correctly applied. For AY 2026-27, the portal should auto-populate ₹60,000 (or the actual computed tax, whichever is lower) as the rebate if your total income is ₹12 lakh or below. If the software does not apply it — which can happen in some offline utilities — check that you have selected the new tax regime and entered total income correctly.

1. Submit and e-verify within 30 days. After successful submission, e-verify using Aadhaar OTP (fastest — takes under 60 seconds), net banking, or a Digital Signature Certificate. If you do not e-verify within 30 calendar days of filing, the return is treated as never filed under CBDT rules — even though your tax payable was zero. You would then need to file a fresh return, and if the due date has passed, it becomes a belated return under Section 139(4).

Key due dates for AY 2026-27:

Late fee under Section 234F for belated filing: ₹5,000 (reduced to ₹1,000 if total income does not exceed ₹5 lakh).

The Marginal Relief Cliff: When One Extra Rupee Costs Thousands

Section 87A creates a hard discontinuity at ₹12 lakh for AY 2026-27. At exactly ₹12,00,000, net tax is zero. At ₹12,00,001, the rebate disappears entirely and computed tax jumps to over ₹60,000 — a cliff with a fall measured in thousands.

Marginal relief partially cushions this by capping the additional tax at the amount by which income exceeds ₹12 lakh. Here is what that looks like in practice:

At ₹12,05,000, your effective marginal rate on the extra ₹5,000 is 100% — every rupee earned above the cliff is consumed by tax. This makes it acutely worthwhile to explore new-regime-permitted deductions that can bring income back to ₹12 lakh:

• Section 80CCD(2): Employer's NPS contribution — deductible under new regime up to 10% of salary (basic + DA) for private sector; 14% for central government employees.
• Section 10(14): Specific allowances notified as exempt (conveyance, transport, etc.) — verify with your employer what is already excluded from taxable salary.

If you are hovering between ₹12 lakh and ₹13 lakh, run the numbers before assuming you are stuck with a large tax bill.

Common Mistakes Zero-Tax Filers Make — and How to Fix Them

Mistake 1 — Not filing because "no tax is due." What happens: TDS refund is permanently forfeited for that year. Losses cannot be carried forward. Income documentation gaps accumulate. Fix: File by 31 July 2026. Zero-tax ITRs cost nothing to file and can be completed in under 30 minutes using the pre-filled ITR on the income tax portal.

Mistake 2 — Using ITR-1 when capital gains or business income exist. What happens: ITR-1 has no Schedule CG. Filing the wrong form makes the return defective. The Income Tax Department issues a notice requiring rectification or a revised return in the correct form — adding complexity and delay to an otherwise simple filing. Fix: Before choosing your form, check your AIS for any entries under SFT codes (Statement of Financial Transactions) related to securities or mutual fund redemptions. Even one mutual fund redemption — profit or loss — shifts you to ITR-2.

Mistake 3 — Ignoring AIS income entries before filing. What happens: If your ITR shows nil interest income but AIS captures ₹45,000 FD interest from your bank, the system flags an automatic mismatch under Section 143(1)(a). You receive an adjustment notice. Even if the final tax after rebate remains zero, you must respond within the stipulated time or the demand is confirmed. Fix: Reconcile every AIS entry with your bank statements and broker ledgers before you file. Include all income — then let the Section 87A rebate do its work and bring your tax to zero.

Mistake 4 — Missing Schedule FA for foreign assets. What happens: A foreign bank account, even with a zero balance, that is not disclosed in Schedule FA can attract a ₹10 lakh penalty per year under the Black Money Act, independent of any income tax liability. Fix: Disclose every foreign asset in Schedule FA every year, without exception. This applies to NRI-origin bank accounts, foreign equity received as ESOPs from an overseas parent company, and any account you operate or are a signatory to abroad.

Mistake 5 — Failing to e-verify within 30 days. What happens: The filed return is treated as not filed. You must file a fresh return, and if the 31 July 2026 deadline has passed, you lose the right to carry forward losses — and incur the Section 234F late fee. Fix: E-verify immediately after submission using Aadhaar OTP. Do not wait for the physical ITR-V option unless you have no alternative.

Mistake 6 — Assuming regime selection does not matter at zero-tax income. What happens: Some filers with significant deductions (LIC premiums, PPF, home loan interest) stay in the old regime by habit, but at income levels below ₹12 lakh, the new regime's zero-tax outcome is typically impossible to beat — regardless of how many Section 80C or Section 24(b) deductions are available. The old regime still delivers zero tax only if income is below ₹5 lakh. Fix: Use the regime comparison tool built into the income tax portal. Run both options before submitting. The tool is free, takes two minutes, and often saves filers from a suboptimal default choice.

What the Zero-Tax Filing Trend Signals for the Broader Tax System

From the government's perspective, 60 million+ zero-tax filers represent something more valuable than a filing count: a structured, annually updated database of incomes, employers, transactions, and assets across a population that had little formal tax footprint a decade ago. As India's per-capita income grows, today's zero-tax filers graduate into the paying base without needing any new policy nudge — the compliance habit is already formed, the data is already flowing, and the AIS-TIS infrastructure enables near-real-time detection of income growth.

For you as the individual taxpayer, the implication is forward-looking: the quality and consistency of your ITR record will matter increasingly as your income grows, as financial institutions become more AIS-linked, and as the Income Tax Department's automated scrutiny systems become more sophisticated. A consistently filed, accurately reconciled nil-tax return builds a credible financial trail that serves you at every future milestone — loan application, visa interview, startup funding round, or property registration.

Key Takeaways

• The zero-tax salary threshold doubled. For AY 2026-27, the effective cap under the new regime is ₹12,75,000 gross salary (₹12 lakh net after standard deduction of ₹75,000) — up from ₹7,75,000 for AY 2025-26.
• Section 87A is a rebate against tax, not a deduction from income. Your total income must be ₹12 lakh or below (new regime, AY 2026-27) for the full ₹60,000 rebate to apply and reduce net tax to zero.
• Zero tax does not mean zero filing obligation. TDS refunds, loss carry-forwards, Schedule FA disclosures, and Section 139(1) seventh proviso triggers all require a validly filed and e-verified ITR.
• E-verify within 30 days of submission, or the return is void — even if tax payable is nil. Use Aadhaar OTP; it takes under 60 seconds.
• The marginal relief cliff at ₹12 lakh creates a 100% effective tax rate on the first few thousand rupees above the threshold. If you are near the boundary, explore Section 80CCD(2) employer NPS contributions to drop back within the zero-tax zone.
• Reconcile your AIS before filing. Unresolved AIS mismatches generate automated notices even for zero-tax filers, adding unnecessary correspondence and delay.
• File by 31 July 2026 to preserve the right to carry forward capital losses and business losses from FY 2025-26. A belated return filed after this date permanently forfeits that right for AY 2026-27.