Finance Minister Nirmala Sitharaman introduced significant changes to tax slabs under the new tax regime in the Union Budget.
In her Budget speech, the FM said individuals earning up to Rs 12 lakh will pay NIL tax from now on. However, this was widely misinterpreted as income up to Rs 12 lakh being tax-exempt, which is not entirely accurate.
How Rs 12 lakh income is taxed
If you earn Rs 12 lakh per annum, your total income falls under three tax slabs:
Rs 0 – Rs 4 lakh → 0% tax
Rs 4 – Rs 8 lakh → 5% tax
Rs 8 – Rs 12 lakh → 10% tax
Other four tax slabs, after 2025-26 budget:
Rs 12- Rs 16 lakh → 15%
Rs 16 lakh – Rs 20 lakh → 20%
Rs 20 lakh – Rs 24 lakh → 25%
Above Rs 24 lakh → 30%
Your total tax liability before any deductions and rebates is calculated as follows:
Rs 4–Rs 8 lakh slab (5%) = Rs 20,000
Rs 8–Rs 12 lakh slab (10%) = Rs 40,000
Total tax liability = Rs 60,000
How tax rebate and Standard Deduction reduce tax to zero
Section 87A rebate has been increased from Rs 25,000 to Rs 60,000, which offsets the entire tax liability of Rs 60,000.
Additionally, a standard deduction of Rs 75,000 further benefits taxpayers. This means that for an annual income of Rs 12.75 lakh (Rs 12 lakh + Rs 75,000 deduction), the final tax liability remains zero.
Tax-Free Vs. Tax-Exempt: Key difference
It is crucial to understand the difference between tax-free income and tax-exempt income:
Tax-exempt income means that a portion of income is legally excluded from taxation.
Tax-free income means that even though tax is applicable, deductions and rebates bring the final tax liability down to zero.
In this case, income up to Rs 12 lakh (or even Rs 12.75 lakh after deductions) is tax-free, not tax-exempt. The tax is still computed but is nullified by the available rebate.
Tax exemption limit for FY 2025-26
For the current financial year, the government has exempted a basic income of up to Rs 4 lakh from taxation. This means:
Individuals earning up to Rs 4 lakh do not need to pay any tax or file an Income Tax Return (ITR).
Beyond Rs 4 lakh, tax liability applies, but deductions and rebates can further reduce the final tax outgo.
Conclusion:
The Budget 2025-26 has given much-needed relief to middle-income earners, with revised tax slabs and an increased Section 87A rebate reducing tax liability to zero for those earning up to Rs 12.75 lakh. However, it is important to understand that this does not mean this income is tax-exempt. Rather, it will be tax-free after adjusting standard deduction and 87A rebate.