New Income Tax Rules: What’s Changing from April 1, 2025
New Income Tax Rules: What's Changing from April 1, 2025 The Finance Act 2024 introduces significant amendments to the income tax framework, set to take effect from April 1, 2025.…
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Budget 2025: No Tax on Income Up to ₹12 Lakhs – Key Updates & Calculation
In the Union Budget 2025, the Finance Minister introduced a groundbreaking change in the tax structure, allowing individuals with an annual income of up to Rs. 12 lakh to pay no income tax. This is not due to an increase in the basic exemption limit but is achieved through an extended rebate under Section 87A of the Income Tax Act. Under this provision, taxpayers with incomes up to Rs. 12 lakh will receive a rebate equal to their tax liability, making their tax outflow nil. However, special rate incomes such as short-term capital gains are not eligible for this rebate. The budget also introduces marginal relief for those exceeding Rs. 12 lakh slightly, preventing a disproportionate tax burden.
Understanding NIL Tax on Rs. 12 Lakh Income
How is Tax Exempted Despite the Basic Exemption Limit Being Rs. 4 Lakh?
The tax exemption up to Rs. 12 lakh does not indicate an increase in the basic exemption limit. Instead, it is achieved through Section 87A, which provides a rebate to taxpayers whose income does not exceed Rs. 12 lakh.
Who is Eligible for the Rebate Under Section 87A?
The rebate under Section 87A applies to resident individuals whose taxable income is up to Rs. 12 lakh. However, Hindu Undivided Families (HUFs), non-resident taxpayers, and firms are not eligible for this rebate.
Tax Computation Illustrations
Example 1: NIL Tax on Rs. 12 Lakh Income
Scenario: Ms.Latha, a retired banker, has the following income sources:
Pension: Rs. 7,75,000
Interest Income: Rs. 3,50,000
Dividend Income: Rs. 1,50,000
Tax Calculation:
| Particulars | Amount (Rs.) | Tax Rate | Tax (Rs.) |
|---|---|---|---|
| Net Pension Income (after standard deduction) | 7,00,000 | – | – |
| Interest & Dividend Income | 5,00,000 | – | – |
| Total Taxable Income | 12,00,000 | – | – |
| Tax Slab: Up to Rs. 4,00,000 | NIL | NIL | |
| Rs. 4,00,000 – 8,00,000 | 5% | 20,000 | |
| Rs. 8,00,000 – 12,00,000 | 10% | 40,000 | |
| Total Tax Payable | – | 60,000 | |
| Rebate under Section 87A | – | (60,000) | |
| Net Tax Payable | – | NIL |
Example 2: Tax Liability on Special Rate Income
Scenario: Mr. Rahul earns a salary of Rs. 9,00,000 and has short-term capital gains (STCG) of Rs. 3,00,000.
Tax Calculation:
| Particulars | Amount (Rs.) | Tax Rate | Tax (Rs.) |
| Gross Salary Income | 9,00,000 | – | – |
| Standard Deduction | (75,000) | – | – |
| Taxable Salary | 8,25,000 | – | – |
| Tax on Salary | – | – | 22,500 |
| Rebate under Section 87A | – | – | (22,500) |
| Tax on Salary after Rebate | – | – | NIL |
| Tax on STCG (20% on Rs. 3,00,000) | – | – | 60,000 |
| Total Tax Payable | – | – | 60,000 |
Since capital gains are taxed at a special rate, they do not qualify for the rebate under Section 87A.
Marginal Relief for Incomes Slightly Above Rs. 12 Lakh
If an individual’s income slightly exceeds Rs. 12 lakh, marginal relief ensures that the tax increase is not excessive.
Example 3: Tax Calculation With Marginal Relief
Scenario: Mr. Ajay earns Rs. 14,00,000 and his employer contributes Rs. 1,00,000 to NPS (Section 80CCD(2)).
Tax Calculation
| Particulars | Amount (Rs.) | Tax Rate | Tax (Rs.) |
| Gross Salary | 14,00,000 | – | – |
| Standard Deduction | (75,000) | – | – |
| Employer NPS Contribution | (1,00,000) | – | – |
| Taxable Salary | 12,25,000 | – | – |
| Tax up to Rs. 12,25,000 | – | – | 63,750 |
| Marginal Relief | – | – | (38,750) |
| Final Tax Payable | – | – | 25,000 |
Understanding Marginal Relief
Since Mr. Ajay’s income exceeds Rs. 12 lakh by Rs. 25,000, he is entitled to marginal relief.
His total tax after relief is limited to Rs. 25,000 instead of the full tax liability.
Marginal relief applies only up to Rs. 12,70,587; beyond this, normal tax rates apply.
Key Highlights of the New Tax Regime
Higher basic exemption limit: Rs. 4 lakh.
Standard deduction: Rs. 75,000 for salaried employees and pensioners.
Rebate under Section 87A extended: Up to Rs. 12 lakh.
Special rate income (capital gains) excluded from rebate eligibility.
Marginal relief available for incomes slightly exceeding Rs. 12 lakh.
Limited deductions allowed:
Standard deduction (Rs. 75,000).
Employer’s NPS contribution under Section 80CCD(2).
Certain allowances for disabled employees and transport expenses.
The NIL tax on income up to Rs. 12 lakh is implemented through an enhanced rebate under Section 87A, not by increasing the basic exemption limit. However, taxpayers with special rate incomes (capital gains, etc.) will still have to pay tax on such earnings. Additionally, marginal relief ensures that those earning slightly above Rs. 12 lakh do not face an excessive tax burden. Taxpayers should carefully evaluate their income sources and deductions to maximize their tax savings under the new tax regime.
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