Published 15:19 IST, February 2nd 2025
Decoding the New Tax Regime: No Tax Till Rs 12 Lakh Explained
The Union Budget 2025 introduces a new tax regime with zero tax on income up to Rs 12 lakh, but how does it actually work?

The Union Budget 2025 has introduced significant changes in the income tax regime, making it more beneficial for middle-class taxpayers. The biggest announcement is that individuals earning up to Rs 12 lakh annually will pay zero income tax under the new regime. For salaried individuals, this exemption extends to Rs 12.75 lakh due to a standard deduction of Rs 75,000.
Finance Minister Nirmala Sitharaman , in her budget speech, stated:
“I am now happy to announce that there will be no income tax payable up to income of Rs 12 lakh (i.e. average income of Rs 1 lakh per month other than special rate income such as capital gains) under the new regime. This limit will be Rs 12.75 lakh for salaried taxpayers, due to a standard deduction of Rs 75,000.”
However, the tax slabs beyond Rs 12 lakh have also changed, leading to some confusion among taxpayers. Let’s break it down.
Revised Income Tax Slabs for FY 2025-26
0-4 lakh rupees - Nil
4-8 lakh rupees - 5 per cent
8-12 lakh rupees - 10 per cent
12-16 lakh rupees -15 per cent
16-20 lakh rupees -20 per cent
20- 24 lakh rupees - 25 per cent
Above 24 lakh rupees - 30 per cent
Under this structure, a person earning Rs 12 lakh would, in theory, have to pay tax. However, due to the Section 87A rebate, the government has ensured that no tax is payable up to Rs 12 lakh.
How Does the Rebate Work?
According to CA Gaurav Makhijani, Head of Tax for North India and Gujarat at Roedl & Partner India: “A person earning Rs 12 lakh would fall under multiple tax slabs, resulting in a tax liability of Rs 60,000. However, under Section 87A, a rebate of Rs 60,000 is applied, making the final tax payable zero.”
For salaried individuals, the Rs 12.75 lakh tax-free limit is achieved by applying the standard deduction of Rs 75,000 before calculating tax.
What Happens If You Earn More Than Rs 12 Lakh?
While the new regime is beneficial for middle-class taxpayers, those earning beyond Rs 12 lakh will start paying tax as per the slabs mentioned above. However, the tax burden has been reduced compared to the previous regime.
For example:
A person earning Rs 16 lakh will now pay only 7.5% effective tax rate, saving Rs 50,000 compared to earlier.
A person earning Rs 20 lakh will pay 10% effective tax rate, saving Rs 90,000 compared to previous slabs.
A person earning Rs 13 lakh will fall under the 15% slab but will benefit from marginal relief, effectively reducing their tax burden.
A person earning Rs 17 lakh will see an effective tax rate of around 8%, benefiting from the revised slab structure and saving a significant amount compared to previous tax rates.
Understanding Marginal Relief: Why Your Tax Won’t Suddenly Jump
One major concern for taxpayers is what happens if their income slightly exceeds Rs 12 lakh. Will they lose the rebate completely?
CA Gaurav Makhijani explains: “If your salary income is Rs 12.90 lakh, you may think you will be paying full tax on the excess amount. However, the government provides a concept called marginal relief, ensuring that the additional tax payable is limited to the extra income earned.”
"Marginal relief as provided earlier under the new tax regime is also applicable for income marginally higher than 12,00,000,’ FM said in her speech.
For example:
If a person earns Rs 12.90 lakh, the additional Rs 15,000 income should not result in a Rs 45,000 tax liability. Marginal relief ensures they only pay tax proportionate to the excess amount earned.
This prevents people from artificially lowering their income to stay within the tax-free bracket.
Should You Switch to the New Tax Regime?
The default tax regime is now the new tax regime, meaning that unless a taxpayer opts for the old regime, they will automatically fall under the new one.
According to Makhijani: “For 99.99% of taxpayers, the new regime is now more beneficial. The old regime only makes sense for those who have significant deductions like home loan interest, HRA, and other tax-saving investments.”
To compare both regimes:
New regime: Simpler, lower tax rates, and no need to track deductions.
Old regime: Beneficial only for those claiming multiple deductions under 80C, 80D, HRA, etc.
What About Government Revenue?
With these tax cuts, the government will forgo Rs 1 lakh crore in direct tax revenue. Economists are questioning how the government will compensate for this loss. Makhijani shares his insights: “Economists are still wondering how the government will manage this tax cut since personal income tax is a major revenue source. The government seems to be banking on increased GST collections as people spend more.”
This tax relief is expected to boost disposable income, leading to higher spending, which in turn increases indirect tax revenue via GST collections.
Conclusion: Who Wins Under the New Regime?
Winners
Salaried individuals earning up to Rs 12.75 lakh pay zero tax.
Those earning Rs 16-20 lakh also see significant tax savings.
People who prefer a simplified tax structure without claiming deductions.
Losers:
Those heavily relying on deductions under the old regime.
People earning just above Rs 12 lakh (need to check marginal relief calculations).
With the new tax regime offering clarity, simplicity, and tax savings, it is expected that most taxpayers will now shift away from the old tax system. While a few may still benefit from the old regime due to deductions, for the vast majority, the new structure is a game-changer.
For taxpayers, the key takeaway is clear: if your income is Rs 12 lakh or less, you will not pay any tax at all. If you earn more, you will still benefit from reduced tax rates compared to before.
As Makhijani summarizes: “At this moment, this is 100% zero tax for those earning up to Rs 12 lakh. For others, the revised slab rates ensure lower tax liability overall.”
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Updated 16:38 IST, February 2nd 2025