Finance Minister Nirmala Sitharaman in her budget speech announced that individuals earning up to Rs 12 lakh per annum won’t be paying any tax under the new tax regime. The revised structure showed an income up to Rs 4 lakh is tax-exempt, Rs 4-8 lakh attracts 5% tax, and Rs 8-12 lakh attracts 10%. So, how does the tax liability become zero on an income up to Rs 12 lakh?
Actually, the FM said that the income up to Rs 12 lakh would be tax-free and didn’t say that it would be tax-exempt. So that means the income up to Rs 12 lakh would be subject to tax liability, but after the benefit of Section 87A rebate, the tax comes to NIL. The government has increased the rebate from Rs 25,000 (earlier applicable to incomes up to Rs 7 lakh) to Rs 60,000, covering incomes up to Rs 12 lakh. Under the new slabs, an individual earning Rs 12 lakh would have a tax liability of Rs 60,000, but this amount gets fully offset by the Rs 60,000 rebate. This is the reason why the FM said the final tax payable would be zero for those earning up to Rs 12 lakh.
Key Budget highlight for taxpayers:
-No income tax for residents with net taxable income up to Rs 12 lakh under the new tax regime.
-For salaried individuals, the standard deduction of Rs 75,000 pushes the tax-free threshold to Rs 12.75 lakh.
-The rebate under Section 87A has been raised from Rs 25,000 to Rs 60,000, increasing the rebate-eligible income limit from Rs 7 lakh to Rs 12 lakh.
-Only the rebate has increased, not the basic exemption limit. If annual income exceeds Rs 12.75 lakh, tax will be calculated as per the new slabs.
This marks a significant shift from the previous regime, offering greater tax relief to middle-income earners and boosting disposable income.
The FM has unveiled “transformative” tax reforms that ranged from a simpler income tax law to higher TCS threshold for remittances and income tax benefits for middle class.
Sitharaman in 2025-26 Budget promised to bring a simpler, less volumnous new law to replace six decades old law governing income tax, saying it will have the spirit of “Nyay” (justice) and will work on the principle of “trust first, scrutinize later”.
She also extended the time limit to 4 years for individuals filing updated tax returns. Updated returns are filed by taxpayers who had omitted to report their correct income. Currently, such returns can be filed within two years of the relevant assessment year.
Nearly 90 lakh taxpayers have voluntarily updated their incomes by paying additional tax.
Over the past 10 years, the government has implemented several reforms for convenience of tax payers, such as faceless assessment, tax payers charter, faster returns, almost 99 per cent returns being on self-assessment, and Vivad se Vishwas scheme, she said.
Sitharaman in her Budget speech said the objectives of her taxation proposal are reforms in Personal Income Tax with special focus on middle class, rationalization of TDS/TCS for easing difficulties and voluntary compliance.
The Budget increased the threshold for tax deduction at source for better clarity and uniformity.
In the FY26 Budget, the limit for TDS deduction on interest for senior citizens has been doubled to Rs 1 lakh from the present Rs 50,000.
Similarly, the annual limit of Rs 2.40 lakh for TDS on rent is being increased to Rs 6 lakh. This will reduce the number of transactions liable to TDS, thus benefitting small tax payers receiving small payments, Sitharaman said.
The threshold to collect tax at source (TCS) on remittances under RBI’s Liberalized Remittance Scheme (LRS) too has been increased from Rs 7 lakh to Rs 10 lakh.
The TCS on remittances for education purposes, where such remittance is out of a loan taken from a specified financial institution, has been exempted.
The Budget 2025-26 gave a relief to middle class with regard to tax incidence and rejigged slabs.
Sitharaman announced that annual income of up to Rs 12 lakh will be exempt from I-T under the new income tax regime. For salaried taxpayers, this income threshold will be Rs 12.75 lakh after taking into account standard deduction.
As per the rejig, for people earning more than Rs 12 lakh per annum, there will be nil tax for income up to Rs 4 lakh, 5 per cent for income between Rs 4 and 8 lakh, 10 per cent for Rs 8-12 lakh, and 15 per cent for Rs 12-16 lakh.
A 20 per cent income tax will be levied on income between Rs 16 and 20 lakh, 25 per cent on Rs 20-24 lakh and 30 per cent above Rs 24 lakh per annum.
A tax payer in the new regime with an income of Rs 12 lakh will get a benefit of Rs 80,000 in tax. A person having income of Rs 18 lakh will get a benefit of Rs 70,000 in tax.
However, the Budget has not made any changes in tax slabs under the old income tax regime, which includes host of tax exemptions and deductions.