It is the appraisal season. While many look forward to salary hikes, an increment may not necessarily translate to an increased take-home pay for an individual moving from a non-taxable to a taxable bracket.

Here’s how. For instance, if a salaried employee, who currently earns ₹12.75 lakh annually and thus pays no income tax, receives a 10% salary hike, his/her annual income rises to ₹14.02 lakh. But effectively, the in-hand hike will only be around 3.5%.

Here’s why. Under the new tax regime, a salaried employee earning ₹12 lakh (excluding a standard deduction of ₹75,000) can claim a rebate of up to ₹60,000, eliminating their tax liability. Thus, salaried employees earning up to ₹12.75 lakh are eligible for the rebate, reducing their tax liability to zero.

With the 10% hike, the salary will cross the rebate threshold of ₹12 lakh under the new tax regime. "The Section 87A rebate, which previously lowered the tax liability to zero for these employees, is no longer applicable. Consequently, they are now required to pay income tax on their entire taxable income after deducting the standard deduction of ₹75,000,” says CA Suresh Surana.

As a result, the post-increment taxable income will rise to ₹13,27,500, resulting in a tax liability of ₹79,125. “After adding 4% health and education cess, the net tax payable will increase to ₹82,290. Despite a gross increase of ₹1,27,500, the actual rise in take-home pay is only ₹45,210 (this means the real increment would come to around 3.5%), reflecting a substantial reduction due to the loss of the rebate and resulting tax outflow," explains Surana.

According to the provisions applicable for FY26 (AY2026–27), the rebate under Section 87A is available to salaried employees whose net taxable income does not surpass the specified limit under the old and new tax regimes. Under the old tax regime, salaried employees are eligible for a rebate of ₹12,500 if their net taxable income is up to ₹5 lakh, effectively reducing their tax liability to zero. However, once the taxable income exceeds this threshold, the rebate no longer applies, and they must pay income tax on the entire salary as per the applicable slab rates. “As such, even a marginal increase in salary beyond the rebate limit can result in a disproportionate tax impact. Hence, proactive tax planning and careful evaluation of both tax regimes are essential to maximise post-tax take-home income,” adds Surana.

How can you still reduce your tax liabilities?

There are a few options by which employees can reduce tax liabilities, even if they cross the salary threshold. If the appraisal pushes the salary to just over the rebate threshold, an employee can explore options such as salary restructuring or timing the variable pay to stay within the rebate limit, wherever feasible, to be able to claim the rebate benefit or marginal relief u/s 87A.

“The taxpayer may consider switching to the old tax regime if eligible deductions (such as Section 80C, 80D, HRA, etc.,) can be claimed to reduce the net taxable income below ₹5 lakh and avail a rebate under Section 87A applicable in that regime,” says Surana.

Investing in tax-saving instruments such as PPF, ELSS, NPS, or health insurance may help lower taxable income if the old regime is opted for.