income tax
In the Union Budget for 2025-26, the government announced pivotal reforms to the income tax regime, aimed at relieving the middle class and boosting consumption. The new structure introduces a tax exemption on annual earnings up to Rs. 12 lakh, coupled with a standard deduction of Rs. 75,000 for salaried individuals, raising the effective limit for these taxpayers to Rs. 12.75 lakh.
The updated tax slabs under the new regime progress as follows:
| Tax Rate | Tax Slab |
|---|---|
| 0% Tax | Income up to Rs. 4 lakh |
| 5% Tax | Income from Rs. 4 lakh to Rs. 8 lakh |
| 10% Tax | Income from Rs. 8 lakh to Rs. 12 lakh |
| 15% Tax | Income from Rs. 12 lakh to Rs. 16 lakh |
| 20% Tax | Income from Rs. 16 lakh to Rs. 20 lakh |
| 25% Tax | Income from Rs. 20 lakh to Rs. 24 lakh |
| 30% Tax | Income exceeding Rs. 24 lakh |
These reforms are designed to considerably lower the tax burden on individuals, thus increasing the disposable income available for household expenses, savings, and investment.
To illustrate the tax savings resulting from the new income limit of Rs. 12 lakh, let’s look at the calculations of tax liability before and after the reforms as explained below :
Existing Slab Rates (New Tax Regime)
| Income Range | Tax Rate | Tax Amount |
|---|---|---|
| 0 – 3,00,000 | 0% | - |
| 3,00,001 – 7,00,000 | 5% | 20,000 |
| 7,00,001 – 10,00,000 | 10% | 30,000 |
| 10,00,001 – 12,00,000 | 15% | 30,000 |
Gross Tax Liability: Rs. 80,000
Less: Rebate u/s 87A: Rs. 0
Net Tax Payable: Rs. 80,000
Proposed Slab Rates (New Tax Regime)
| Income Range | Rate of Tax | Amount of Tax |
|---|---|---|
| 0 – 4,00,000 | 0% | - |
| 4,00,001 – 8,00,000 | 5% | 20,000 |
| 8,00,001 – 12,00,000 | 10% | 40,000 |
Gross Tax Liability: Rs. 60,000
Less: Rebate u/s 87A: Rs. 60,000
Net Tax Payable: Rs. 0
Under The Union Budget 2025, the Standard Deduction under the New Tax Regime has been increased from ₹50,000 to ₹75,000. This standard deduction is eligible for Salaried individuals and Pensioners (receiving pension taxable as salary) under Section 115BAC. For family pensioners, a separate standard deduction of ₹25,000 applies under the New Tax Regime. These deductions has raised the effective limit for taxpayers to 12.75 Lakh. Under the New Tax Regime, No other exemptions or deductions are allowed (e.g., HRA, 80C).
The Union Budget 2025 recommended Marginal Relief under the New Tax Regime to offer tax fairness to individuals whose income slightly exceeds the tax-free threshold of ₹12 lakh (₹12.75 lakh for taxpayers in the salary class with the standard deduction). This action prevents taxpayers from unnecessarily paying disproportionately excessive tax due to minor increases in income. It shuts the "tax cliff" effect, where a small rise in income results in a very high rise in tax imposition.
The Marginal Relief is eligible for resident individuals with a taxable income of between ₹12 lakh-₹12.75 lakh under the New Tax Regime. Not for Non-Resident Indians (NRIs), Hindu Undivided Families (HUFs), or those persons opting for the Old Tax Regime.
The relief ensures that the overall tax burden never surpasses the excess income above ₹12 lakh. For incomes above ₹12.75 lakh: Marginal relief is not applicable since slab rates are used for taxes.
The Calculation is based on: Marginal Relief = Additional Tax Payable – Excess Income Over ₹12 Lakh.
The Section 87A rebate (introduced in Budget 2025) is intended to lower tax liability for resident individuals with taxable income up to ₹12 lakh under the New Tax Regime. This rebate does not, however, extend to income charged to special rates, e.g., capital gains or winnings from lotteries.
Non-Applicable Heads of Income for Section 87A Rebate Under the New Tax Regime for Financial Year 2025-26 :
Long-Term Capital Gains (LTCG) under Section 112A : 12.5% Tax Rate will be levied on gains above ₹1.25 lakh (FY 2025-26) The rebate under Section 87A cannot reduce taxes on these gains. Applicable to LTCG from listed equity shares, equity-oriented mutual funds, or units of business trusts held for over 12 months.
Short-Term Capital Gains (STCG) under Section 111A : Tax Rate of 20% will be charged on profits from equity shares/units disposed of within 12 months. Taxes on STCG under Section 111A are computed independently and are not eligible for the Section 87A rebate.
Other Special Rate Incomes : Winning prizes in lotteries, horse racing, etc. (Section 115BB): Charged at 30% without deductions. Online gaming gains (Section 115BBJ): 30% of net gains. Virtual digital assets (such as crypto) (Section 115BBH): 30% tax on profits. Long-term profit on non-equity assets (Section 112): 12.5% or 20% (indexation)
The new provisions mean that individual taxpayers earning up to Rs. 12 lakh will benefit from a full rebate under Section 87A, effectively reducing their tax liability to zero. This advantageous shift allows what was previously a gross tax liability of Rs. 80,000 under the old structure to be eliminated entirely, thus increasing disposable income with households significantly.
Finance Minister Nirmala Sitharaman highlighted the intent behind these tax reforms, stating the aim is to streamline the tax system, minimize litigation, and bolster citizen trust in governance. By lowering the tax burden, the government seeks to stimulate household consumption and economic growth, ultimately contributing to the broader vision of a developed India.
The new tax framework reflects a commitment to ensuring that all taxpayers benefit from a simpler, more predictable system, fostering economic progress while promoting good governance. The Finance Minister's approach reiterates a responsive governance strategy tailored to the needs and expectations of the citizens.