No income tax up to Rs 12 lakh: What it means if you earn more

Union Finance Minister Nirmala Sitharaman has delivered a massive relief for the middle class, announcing that those earning up to Rs 12 lakh will be exempt from paying income tax.

For salaried taxpayers, this exemption rises to Rs 12.75 lakh, considering a Rs 75,000 standard deduction.

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The revision of tax slabs is expected to reduce the financial strain on salaried individuals, providing them with greater disposable income and promoting consumption.

But what happens if your annual salary exceeds Rs 12 lakh?

Let’s find out:

Understanding revised income tax slabs and rebate

It might seem that a salaried individual earning Rs 15 lakh would only be taxed on the excess Rs 3 lakh over the Rs 12 lakh exemption. However, this is not correct.

The exemption applies solely to incomes up to Rs 12 lakh. Those with higher taxable income are subject to the slab-based taxation process.

Sitharaman increased the exemption threshold from Rs 7 lakh to Rs 12 lakh in the new income tax regime. Accordingly, anyone earning up to Rs 12 lakh a year is exempt from income tax, while salaried individuals benefit from an effective limit of Rs 12.75 lakh due to the standard deduction.

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If your taxable income exceeds Rs 12 lakh by even a rupee, you will be taxed according to the slab rates under the new regime. Previously, individuals earning up to Rs 12 lakh were liable for a tax of Rs 80,000 under this system.

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The tax slabs in the new regime are as follows:

• Zero to Rs 4,00,000: No Tax

• Rs 4,00,000 to Rs 8,00,000: 5%

• Rs 8,00,0001 to Rs 12,00,000: 10%

• Rs 12,00,001 to Rs 16 lakh: 15%

• Rs 16,00,001 to Rs 20 lakh: 20%

• Rs 20,00,001 to Rs 24 lakh: 25%

• Above Rs 24 lakh: 30%

This marks a notable change from the previous regime, where any income above Rs 15 lakh was taxed at a flat rate of 30%. The updated brackets offer considerable savings for those earning between Rs 12 lakh and Rs 24 lakh.

The first slab has shifted from Rs 0–3 lakh to Rs 0–4 lakh, and an additional slab has been introduced, resulting in a total of seven slabs.

For taxpayers with normal income up to Rs 12 lakh (excluding special rate incomes such as capital gains), a tax rebate is available in addition to the benefit from the reduced slab rates, ensuring that no tax is payable.

Under the new regime, a taxpayer earning Rs 12 lakh will receive a tax benefit of Rs 80,000, which represents 100% of the tax payable as per the existing rates.

How much tax will you have to pay if you earn more than Rs 12 lakh?

If your taxable income is Rs 13 lakh, you’ll be charged 15% on the portion between Rs 12 lakh and Rs 13 lakh, which comes to Rs 15,000. This results in a total tax liability of Rs 75,000, compared to the earlier Rs 1 lakh - saving you Rs 25,000 in tax.

For someone earning Rs 16 lakh, the tax benefit amounts to Rs 50,000, giving an effective tax rate of just 7.5%.

A person with a Rs 18 lakh income will enjoy Rs 70,000 in tax savings, leading to an effective tax rate of 8.8%.

Similarly, with an income of Rs 20 lakh, the tax benefit will be Rs 90,000, resulting in an effective tax rate of 10%.

For an income of Rs 25 lakh, the tax benefit increases to Rs 1,10,000, which translates to an effective tax rate of 13.2%.

Even someone earning Rs 50 lakh will receive a tax benefit of Rs 1,10,000, leading to an effective tax rate of 21.6%.

Previously, under the new tax regime, incomes above Rs 15 lakh were taxed at a flat rate of 30%. However, the Finance Minister has proposed that incomes between Rs 12 lakh and Rs 16 lakh be taxed at 15%, incomes between Rs 16 lakh and Rs 20 lakh at 20%, and incomes between Rs 20 lakh and Rs 24 lakh at 25%.

The 30% rate will now only apply to incomes above Rs 24 lakh.

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Old regime vs new regime: Which one should you choose?

Since the Budget did not announce any changes to the old regime, it can be assumed to remain unchanged. Under the old system, income above Rs 10 lakh was taxed at 30%. For example, someone with a taxable income of Rs 12 lakh would incur a tax of Rs 1,72,500.

For an income of Rs 15 lakh, the tax would be Rs 2,62,500. The final tax amount will depend on the exemptions claimed by the taxpayer, who will need to choose between the new and old regimes based on their financial situation.

For years, taxpayers favoured the old tax regime because of deductions like Section 80C (Rs 1.5 lakh), HRA (House Rent Allowance), Home Loan Interest Deduction, and NPS Contributions.

However, with significantly lower tax rates in the new regime, it is proving to be more advantageous for most taxpayers, even with deductions.

No tax for people earning up to Rs 12 lakh

People earning up to Rs 12 lakh annually will be exempt from paying income tax under the new tax regime. Major exemptions and changes have been introduced under the revised tax structure.

“I am now happy to announce that there will be no income tax payable up to an income of Rs 12 lakh (i.e., an average income of Rs 1 lakh per month, other than special rate income such as capital gains) under the new regime,” the finance minister stated.

The Centre’s move to adjust the tax slabs in the Union Budget 2025 is designed to reduce the tax burden on the middle class, leaving more disposable income in their hands. This is expected to boost household consumption, savings, and investment.

The tax exemption will result in a Rs 1 lakh crore reduction in direct taxes and a Rs 2,600 crore loss in indirect tax revenue.

With inputs from agencies