Union Budget 2025: Income tax exemption till Rs 12 lakh or Rs 4 lakh? Confusion clarified

The union budget gave the middle class a reason for jubilation when finance minister Nirmala Sitharaman, while presenting the union budget 2025, proposed no personal income tax up to a salary of Rs 12 lakh.

Then, even before the ‘Modi, Modi, Modi’ chants could die out, she confounded a better part of the citizenry by coming out with new tax slabs starting from Rs 4 lakh.

So is the tax cut on incomes up to Rs 12 lakh, or is it only Rs 4 lakh? Let us clarify it once and for all.

With an eye on slowing spending amongst the masses, GDP in decline and inflation in food items, the Modi government finally bit the silver bullet of tax cuts to spur growth today. Or rather, through the income tax bill, which will be tabled in Parliament next week. However, its headline grabber for a cut, was teased as part of the budget: No tax on income up to 12 lakh, which in effect means no tax on incomes up to Rs 12.75 lakh considering the standard deduction.

But a simultaneous announcement of new slabs as part of the new tax regime was confusing. Zero to Rs 4 lakh = nil tax, Rs 4–8 lakh = 5 per cent tax, Rs 8–12 lakh = 10 per cent tax, Rs 12–16 lakh = 15 per cent tax, Rs 16–20 lakh = 20 per cent tax, Rs 20-24 lakh = 25% and above Rs 24 lakh rupees = a flat 30 per cent tax.

While tax slabs may be a necessary evil, what confused many was the contradiction between the announcement of no tax up to Rs 12 lakh and then saying no tax up to Rs 4 lakh and then different percentages of taxes for slabs like 4 to 8, 8 to 12 ,etc.

Does that mean you have to pay tax if salary is more than Rs 12 lakh, or 12.75 lakh to be precise, only, or do we start paying if it crosses Rs 4 lakh?

The important thing you have to understand is that there is a standard deduction that has gone up, as well as a tax rebate that has also gone up. While the exemption under 87A moves up from Rs 7 lakh to Rs 12 lakh as announced today, there is also an additional tax rebate under clause A of the same provision, that has been raised from Rs 25,000 to Rs 60,000.

So how this tax cut up to Rs 12 lakh works, is like this: You don’t pay any income tax any which way if your salary is up to Rs 4 lakh. Now, any salary between Rs 4 lakh and Rs 12 lakh will have to pay taxes at 5 per cent or 10 per cent depending on the slab under which it comes (5 per cent if the salary is between Rs 4 lakh and Rs 8 lakh, 10 per cent if it is between Rs 8 lakh and Rs 12 lakh, and so forth). But this tax due will be LESS than the tax rebate, which is Rs 60,000 plus the standard deduction of Rs 75,000.

In effect, you don’t pay any tax at all if your salary is up to 12 lakh.

But then, if your salary is even one rupee more than 12 lakh, yes, you have to pay as per the slab rates. One taxation expert told us you have to pay only the difference, while another expounded that if your salary is above 12 lakh, you end up paying for the full amount as per the new slabs announced.

But even here, you can rest assured of some sort of savings, thanks to the increased deduction and rebates that will apply across the board. For example, while those up to 12 lakh enjoy full tax cuts, even those in higher brackets like Rs 50 lakh income, who were paying nearly Rs 12 lakh as tax, will end up paying only Rs 10.8 lakh with the new configuration.

Of course, there are exceptions. All these changes are applicable only to the New Tax Regime, which by now is almost the de facto tax structure. It is only for resident Indians, And it is also applicable only to salaried income, not to business establishments. Or any special income like capital gains, the likes of money you get from selling a house, for example.