Union Budget 2025: No Income Tax for Earnings Up to Rs 12 Lakh

In a significant relief for middle-class taxpayers, Finance Minister Nirmala Sitharaman, during the Union Budget 2025, announced an increase in the tax rebate under Section 87A. This will ensure that individuals with a net taxable income of up to Rs 12 lakh will not have to pay any tax under the new income tax regime.

Union Budget 2025 increases the tax rebate under Section 87A, offering zero tax for incomes up to Rs 12 lakh. Learn about the new slabs and benefits.

Union Budget 2025 increases the tax rebate under Section 87A, offering zero tax for incomes up to Rs 12 lakh. Learn about the new slabs and benefits.

Key Highlights:

  • Resident individuals with a net taxable income up to Rs 12 lakh will now be exempt from paying income tax. For salaried employees availing the standard deduction of Rs 75,000 under the new tax regime, the tax-free threshold extends to Rs 12.75 lakh. This marks a substantial rise from the earlier limit of Rs 7 lakh under the new tax regime.
  • The finance minister has increased the tax rebate limit, not the basic exemption limit. Hence, if your annual income surpasses Rs 12.75 lakh, taxes will be computed according to the new slabs starting from the upcoming assessment year.
  • As per the Budget Memorandum, the rebate limit under Section 87A has been raised from Rs 7,00,000 to Rs 12,00,000 for taxpayers under Section 115BAC(1A). Additionally, the rebate amount under clause (a) of the first proviso to Section 87A has been enhanced from Rs 25,000 to Rs 60,000.

Revised Tax Slabs:

The Finance Minister also introduced changes to the tax slabs, now structured as follows:

  • Up to Rs 4 lakh: No tax
  • Rs 4 lakh to Rs 8 lakh: 5% tax
  • Rs 8 lakh to Rs 12 lakh: 10% tax
  • Rs 12 lakh to Rs 16 lakh: 15% tax
  • Rs 16 lakh to Rs 20 lakh: 20% tax
  • Rs 20 lakh to Rs 24 lakh: 25% tax
  • Above Rs 24 lakh: 30% tax

Income Tax Rebate Enhancements for FY 2026-27:

Starting from the assessment year 2026-27, the rebate under Section 87A will be enhanced as follows:

  • The eligibility limit for claiming the rebate will rise from Rs 7 lakh to Rs 12 lakh under Section 115BAC.
  • The maximum rebate amount will increase from Rs 25,000 to Rs 60,000.
  • This rebate will not be applicable to incomes taxed at special rates, such as capital gains.

“To taxpayers with normal income up to Rs 12 lakh, excluding special rate income like capital gains, a tax rebate is being provided alongside slab rate reductions, ensuring no tax liability for them,” said Nirmala Sitharaman.

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What This Means:

  • Normal Income: Refers to regular income such as salary, wages, or business profits. It does not cover special rate income like capital gains, which are taxed differently.
  • Tax Rebate: The Section 87A rebate means that if your net taxable income is up to Rs 12 lakh, your tax liability will be effectively reduced to zero.
  • Slab Rate Reduction: The revised tax slabs make it easier for individuals in this income range to pay lower taxes. For example, those earning between Rs 4 lakh and Rs 12 lakh will face reduced tax rates (5% to 10%), and combined with the rebate, this results in zero tax liability.

Does This Mean Individuals Earning Rs 15 Lakh Pay Tax Only on Rs 3 Lakh?

No, the rebate applies solely to those earning up to Rs 12 lakh. If your taxable income exceeds Rs 12 lakh, you will have to pay taxes based on the applicable slab rates under the new tax regime.

Impact on Taxpayers:

  • Middle-Class Tax Relief: The enhanced rebate is a positive step for salaried individuals and middle-income taxpayers. It will increase disposable income, encouraging savings, spending, and investments.
  • Rebate Under Section 87A: Taxpayers with incomes below Rs 12 lakh will not owe any taxes. “Significant changes have been introduced in personal income tax with adjustments in slabs and reduced tax rates. Extending the rebate threshold to Rs 12 lakh will lower the final tax burden. However, this benefit does not apply to income taxed under special rates. Taxpayers should compare the new and old tax regimes to determine the most beneficial option, considering restrictions on switching for certain categories,” said Ritika Nayyar, Partner, Singhania & Co.

Statements from Sitharaman:

  • A taxpayer earning Rs 12 lakh will save Rs 80,000 in taxes, covering 100% of the tax previously payable.
  • An individual with an annual income of Rs 18 lakh will benefit from a Rs 70,000 tax reduction, which is 30% of the earlier tax liability.
  • For higher-income earners, such as those making Rs 25 lakh, there will be a tax benefit of Rs 1.10 lakh, reducing the payable tax by 25%.

Broader Economic Implications:

  • Enhanced Consumer Spending: With increased disposable income, middle-class households are expected to boost consumer demand, benefiting sectors like retail, real estate, and automotive.
  • Impact on Government Revenue: The government projects a revenue loss of approximately Rs 1 lakh crore from direct taxes and Rs 2,600 crore from indirect taxes due to these changes. However, the anticipated economic growth from increased consumer activity could offset some of this loss.
  • Simplification of Tax Filing: The streamlined tax slabs and rebate structure reduce the complexity of tax filing, making compliance easier for individuals.

Expert Insights:

Tax experts believe these reforms could shift more taxpayers towards the new tax regime. “By simplifying the tax structure and offering significant rebates, the government aims to make the new regime more attractive,” said Arvind Rao, a tax consultant based in Mumbai.

Potential Challenges:

  • Limited Benefits for High-Income Earners: Individuals earning above Rs 24 lakh may not see substantial tax relief compared to middle-income groups.
  • Transition Concerns: Taxpayers accustomed to the old regime may need time to adjust and evaluate the benefits of switching.

Conclusion:

The Union Budget 2025 introduces transformative changes aimed at easing the tax burden for the middle class, encouraging economic activity, and simplifying the tax system. While the increased rebate and revised slabs offer substantial relief, taxpayers should carefully assess their financial situations to choose the most advantageous tax regime.

Disclaimer: The information provided in this article is for general informational purposes only. It is not intended as financial or legal advice. Please consult your financial advisor before making any decisions.

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