Budget 2025: Income Up To Rs 12 Lakh Not Tax Exempt? Know How Taxpayers Will Be Impacted By New Tax Slabs And Enhanced Rebate

The Union Budget for 2025 was presented on Saturday, February 1 by Finance Minister Nirmala Sitharaman. Among the key announcements made on Saturday was the revision of income tax slabs under the new tax regime. The move was welcomed by members of the middle class as it is set to offer much-needed relief and increase disposable income.

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While the move is welcome, taxpayers must note that tax-exempt and tax-free are completely different tax treatments. The Finance Minister has said that individuals who earn up to Rs 12 lakh will pay ‘NIL’ tax. However this does not make income tax up to Rs 12 lakh tax-exempt, but rather tax-free once the deductions and rebates are applied.

Notably, the rebates available under the New Tax Regime were also enhanced as a part of the tax reforms introduced by Sitharaman in her Budget speech.

Poorva Prakash, Partner, Deloitte India told Outlook Money that the proposed changes in income tax slabs are aimed at reducing taxation of the Indian middle class and increasing their spending power.

“Slabs and rates have been proposed to be changed across the board to benefit all taxpayers under the new tax regime. This will lower the tax outflow of taxpayers opting for the new tax regime. Further, the enhancement of rebate, resulting in nil taxation for income up till 12 lakhs under the new tax regime, will result in a substantial reduction of taxes for the middle class. This will increase their spending power, resulting in enhanced household consumption, savings and investment,” Prakash said.

The government has increased the tax rebate limit available under Section 87A of the Income Tax Act from Rs 25,000 to Rs 60,000. Additionally, the income bracket on which this rebate was given has also been increased from up to Rs 7 lakh to Rs 12 lakh.

Taxpayers can also benefit from the Standard Deduction of Rs 75,000 offered under the New Tax Regime. With the addition of the Standard Deduction taxpayers can reduce their tax liability to zero if they have an annual income of up to Rs 12.75 lakh (Rs 12 lakh + Rs 75,000 Standard Deduction).

How Income Will Be Taxed

Now let’s understand the taxation for income up to Rs 12 lakh with an example. If ‘A’ earns a salary of Rs 12,75,000 and is under the New Tax Regime their tax liability will be calculated in the following manner. First A can avail a standard deduction of Rs 75,000 leaving 12,00,000 to be taxed.

In the taxation process the Rs 12 lakh income will first be broken down into parts and then taxed according to the tax bracket. The first Rs 4 lakh amount will be tax-exempt. After that taxation rate of 5 per cent (applicable for the Rs 4 lakh to Rs 8 lakh bracket) will be applied on the next Rs 4 lakh, the remaining Rs 4 lakh will be taxed in the Rs 8 to Rs 12 lakh bracket at 10 per cent. Adding the taxation on all three amounts will result in a total tax liability of Rs 60,000.

Once A claims the rebate amount of Rs 60,000 under Section 87 A the total tax liability of A will reduce to zero, resulting in ‘nil’ taxation.

Tax and investment expert Balwant Jain told Outlook Money that the increased rebate and the new tax-slabs have been introduced to increase the disposable income and put more money in the hands of the taxpayer additionally the government also wants taxpayers to report their actual income instead of showing an income which includes deductions.

“Broader aim is to put more money in the hands of the taxpayer so that the money gets spent. The young salaried generation believes in spending the money, increasing the disposable income can potentially boost consumption. Secondly the government wants taxpayers to report their actual income as the deductions which are shown by taxpayers distort the actual taxable income figure. The government wants the actual numbers and thus they have given a silent burial to the Old Tax Regime as the New Tax Regime is more beneficial for a larger number of people,” Jain said.

Jain added that the shift from the Old Tax Regime to the New Tax Regime has been made to increase spending and bolster consumption which in turn can make India a demand driven economy.

“I think the Old Tax Regime was savings oriented. However now the government does not want people to save. Government wants you to spend the money and induce the demand in the economy and enhance the GDP. There is a push to create a consumption based economy and a demand driven economy,” Jain said.