Finance Minister Nirmala Sitharaman introduced significant changes to tax slabs under the new tax regime in the Union Budget yesterday, resulting in positive changes to the taxes you will pay for the financial year 2025-26.
In her Budget speech, the FM stated that individuals earning up to Rs 12 lakh will pay NIL tax. However, this was widely misinterpreted as income up to Rs 12 lakh being tax-exempt, which is not entirely accurate.
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
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.
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.
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.
The Budget 2025-26 has introduced significant relief to middle-income earners, with a combination of revised tax slabs, an increased Section 87A rebate, effectively reducing tax liability to zero for individuals earning up to Rs 12.75 lakh. However, it is important to understand that this does not mean income up to Rs 12 lakh is tax-exempt — rather, the tax liability is nullified through deduction and rebate.
For those earning beyond Rs 12.75 lakh, tax planning through available exemptions and deductions remains crucial to optimising their tax outgo.