The Union Budget 2025 has introduced significant changes to the income tax structure, particularly under the new tax regime. One of the most notable updates is that individuals earning up to ₹12 lakhs annually will now have zero tax liability. This is a game-changer for taxpayers, especially middle-income earners. Here’s a detailed breakdown of how this works and what it means for you.
Revised Tax Slabs for FY 2025-26 (New Tax Regime)
The modified tax slabs under the new tax regime for the financial year 2025-26 are as follows:
| Income Slab (₹) | Tax Rate |
| Up to ₹4,00,000 | 0% |
| ₹4,00,001 – ₹8,00,000 | 5% |
| ₹8,00,001 – ₹12,00,000 | 10% |
| ₹12,00,001 – ₹16,00,000 | 15% |
| ₹16,00,001 – ₹20,00,000 | 20% |
| ₹20,00,001 – ₹24,00,000 | 25% |
| Above ₹24,00,000 | 30% |
How Does Zero Tax Liability Work for Income Up to ₹12 Lakhs?
The key to this update lies in the enhanced rebate under Section 87A. Here’s how it works:
- Increased Rebate Limit:
The rebate under Section 87A has been raised from ₹25,000 to ₹60,000 for individuals opting for the new tax regime. This means taxpayers can reduce their tax liability by up to ₹60,000. - Tax Calculation for ₹12 Lakhs Income:
- Income up to ₹4,00,000: 0% tax (₹0)
- Income from ₹4,00,001 to ₹8,00,000: 5% tax (₹20,000)
- Income from ₹8,00,001 to ₹12,00,000: 10% tax (₹40,000)
- Total Tax Liability: ₹60,000
- Since the rebate under Section 87A is ₹60,000, the net tax liability becomes zero.
- Marginal Relief:
Marginal relief is still applicable, ensuring that taxpayers do not pay more tax than the incremental income earned when crossing a slab.
Key Points to Remember
- Rebate Restrictions:
The enhanced rebate under Section 87A is not applicable to income taxed at special rates, such as capital gains under Section 112A. - Optional Old Regime:
While the new tax regime offers lower tax rates and zero liability for income up to ₹12 lakhs, taxpayers can still opt for the old regime if it is more beneficial for them (e.g., if they have significant deductions and exemptions). - Standard Deduction:
The standard deduction of ₹50,000 is now available under both the old and new tax regimes, providing additional relief to salaried individuals.
What Does This Mean for Taxpayers?
The increased rebate and revised tax slabs under the new regime are designed to simplify the tax structure and reduce the burden on middle-income earners. Here’s how it impacts different income groups:
- Income Up to ₹12 Lakhs:
- Zero Tax Liability: No tax payable after applying the ₹60,000 rebate.
- Boost to Disposable Income: More money in hand for savings, investments, or expenses.
- Income Above ₹12 Lakhs:
- Lower tax rates under the new regime compared to the old regime (if deductions are minimal).
- Opportunity to save more by choosing the right tax regime.
Conclusion
The Budget 2025 update is a significant step toward making the new tax regime more attractive for taxpayers. With zero tax liability for income up to ₹12 lakhs and lower tax rates for higher income brackets, individuals can now enjoy greater financial flexibility. However, it’s essential to evaluate your specific financial situation and choose the tax regime that works best for you.