In a major move to reduce the tax burden on the middle class, finance minister in her Union Budget 2025 speech, announced that no income tax will be payable for incomes up to ₹12 lakh under the new tax regime.
However, this has caused some confusion, especially since the income tax slabs still show taxes for income brackets from ₹0 to ₹12 lakh.
Let's decode how the income tax relief for those earning up to ₹12 lakh works:
Revised tax slabs
0 - 4 lakh: No tax
₹4 - ₹8 lakh: 5% tax
₹8 - ₹12 lakh: 10% tax
₹12 - 16 lakh: 15% tax
16 - 20 lakh: 20% tax
20 - 24 lakh: 25% tax
Above 24 lakh: 30% tax
Earlier tax slab (for FY 2024-25)
Up to ₹3 lakh - No tax
₹3 lakh - ₹7 lakh 5%
₹7 lakh - ₹10 lakh 10%
₹10 lakh - ₹12 lakh 15%
{{/usCountry}}₹10 lakh - ₹12 lakh 15%
{{/usCountry}}₹12 lakh - ₹15 lakh 20%
Above ₹15 lakh 30%
The rebate that makes income up to ₹12 lakh tax-free
The confusion arises because the new structure offers a tax rebate, which effectively cancels out the tax payable for individuals earning up to ₹12 lakh. The new structure does not categorically mention zero tax till ₹12 lakh income. Here’s how it works:
For a person earning ₹12 lakh per year, the tax calculation based on the old slabs would be:
₹0 - ₹4 lakh: No tax
₹4 lakh - ₹8 lakh: 5 per cent tax on ₹4 lakh = ₹20,000
₹8 lakh - ₹12 lakh: 10 per cent tax on ₹4 lakh = ₹40,000
Total tax = ₹60,000
While the slabs mention rate of taxes for incomes from ₹4 lakh till ₹12 lakh, due to the tax rebate, people falling in these brackets will end up not paying any tax, because the rebate eliminates the entire ₹60,000. This simply means, the effective tax benefit in the fresh income tax slabs for those earning up to ₹12 lakh is ₹60,000.
The finance minister explained it clearly: "For taxpayers with income up to ₹12 lakh (other than special income like capital gains), tax rebate is being provided, so no tax is payable."
What about higher incomes?
If a person’s income exceeds ₹12 lakh, the tax rebate does not apply for the first ₹12 lakh. For example, someone earning ₹16 lakh will have tax calculated for the income over ₹12 lakh as follows:
₹0 - ₹4 lakh (of ₹18 lakh): No tax
₹4 lakh - ₹8 lakh (of ₹16 lakh): 5 per cent tax on ₹4 lakh = ₹20,000
₹8 lakh - ₹12 lakh (of ₹16 lakh): 10 per cent tax on ₹4 lakh = ₹40,000
₹12 lakh - ₹16 lakh: 15 per cent tax on ₹4 lakh = ₹60,000
Total tax for a person in ₹12-16 lakh bracket = ₹1,20,000
Tax will be calculated similarly for income slabs of ₹16 - 20 lakh, ₹20 - 24 lakh, and above ₹24 lakh salary.
The tax reform in finance minister Nirmala Sitharaman's Union Budget 2025 is expected to substantially reduce the tax burden on the middle class, leaving more money in the hands of taxpayers.
The Prime Minister Narendra Modi-led government aims to encourage greater household consumption, savings, and investment, all while making the tax process simpler and more transparent.