Finance Minister Nirmala Sitharaman, in her Union Budget 2025 speech, introduced significant tax relief measures aimed at benefiting a large section of taxpayers by bringing changes to the new income tax regime. One of the most impactful announcements was that individuals earning up to Rs 12 lakh annually would not have to pay any income tax. Additionally, the tax slab structure was revised, extending the nil tax bracket from Rs 0-3 lakh to Rs 0-4 lakh. These announcements were met with both appreciation and confusion, as many taxpayers began to question whether income was truly tax-free up to Rs 4 lakh or Rs 12 lakh, leading to widespread discussions about the new provisions.
The confusion primarily arises from the distinction between the revised tax slab structure and the rebate mechanism under Section 87A. According to the newly proposed tax slab structure, no tax is levied on income up to Rs 4 lakh. However, beyond this amount, different tax rates apply in a progressive manner: income between Rs 4 lakh and Rs 8 lakh is taxed at 5%, income from Rs 8 lakh to Rs 12 lakh is taxed at 10%, income from Rs 12 lakh to Rs 16 lakh is taxed at 15%, income from Rs 16 lakh to Rs 20 lakh is taxed at 20%, income from Rs 20 lakh to Rs 24 lakh is taxed at 25%, and income beyond Rs 24 lakh is taxed at 30%. While this structure lays out a clear taxation policy, the additional provision of a rebate under Section 87A ensures that individuals earning up to Rs 12 lakh ultimately pay no tax.
To better understand how this tax system functions, consider an example. Suppose an individual earns Rs 50 lakh annually. Their income tax would be computed based on the revised slabs. The first Rs 4 lakh is completely exempt from tax, while the next slab, covering income from Rs 4 lakh to Rs 8 lakh, is taxed at 5%, the portion from Rs 8 lakh to Rs 12 lakh is taxed at 10%, and so on, as per the detailed slab structure. However, for individuals whose total taxable income does not exceed Rs 12 lakh, a rebate mechanism is applied under Section 87A. This rebate effectively offsets the tax liability, reducing the final payable tax amount to zero, despite taxes being computed at each level.
Several experts have weighed in to explain the details of the tax structure. Ritika Nayyar, Partner at Singhania & Co., explained that Rs 4 lakh is the initial threshold where no tax is levied at all, which essentially functions as a 0% tax rate. The announcement regarding income up to Rs 12 lakh being tax-free does not mean that tax is not calculated for those earnings; rather, it refers to the application of the rebate under Section 87A, which ensures that any tax computed for individuals earning up to Rs 12 lakh is completely nullified. Manish Dubey, Partner at CorpAcumen Advisors, further clarified that tax slabs technically start at Rs 4 lakh, and tax is computed based on these slabs. However, if the total taxable income remains within the Rs 12 lakh threshold, the rebate provided cancels out the total tax liability, meaning that the final amount payable remains zero.
These tax reforms are expected to provide significant relief to middle-class taxpayers, particularly salaried individuals and small business owners who fall within this income bracket. By ensuring that individuals earning up to Rs 12 lakh effectively pay no tax, the government aims to boost disposable income and stimulate economic activity. However, given the initial confusion surrounding the announcement, the government may need to issue further clarifications to ensure that taxpayers fully understand how these provisions function. With these reforms, the budget reflects the government’s commitment to simplifying tax compliance while also ensuring that citizens have more financial freedom to spend, save, and invest in the economy.
