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Published 13:53 IST, February 1st 2025

New Income Tax Slabs Explained: How You Pay No Tax on a Rs 12 Lakh Salary

At first glance, someone earning Rs 12 lakh should pay 10% tax, but Section 87A rebate reduces the liability to zero.

Reported by: Business Desk
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Govt announces biggest tax relief for common man in Union Budget 2025 | Image: Republic Media Network

New Income Tax Slabs Explained: The government has introduced a new tax regime that ensures zero tax for incomes up to Rs 12 lakh under the new slabs. But how does this work?

Income tax slabs (FY 2025-26) – New regime

Under the latest income tax slabs for FY 2025-26, income up to Rs 4 lakh is tax-free. For earnings between Rs 4 lakh and Rs 8 lakh, a 5% tax rate applies, while income from Rs 8 lakh to Rs 12 lakh is taxed at 10%. The next slab, covering income from Rs 12 lakh to Rs 20 lakh, is taxed at 15%, and any income above Rs 20 lakh falls under the highest tax bracket of 30%.

At first glance, it seems like someone earning Rs 12 lakh should be paying tax under the 10% slab. However, thanks to rebate under Section 87A, the actual tax liability turns out to be zero.

Why is there no tax on Rs 12 lakh income?

Assuming a person has ₹12 lakh annually as taxable income, here's how the tax is calculated:

  • Income up to Rs 4 lakh = 0% tax
    Tax = Rs 0
  • Income from Rs 4 lakh to Rs 8 lakh = 5% tax
    Tax = Rs 20,000 (5% of Rs 4 lakh)
  • Income from Rs 8 lakh to Rs 12 lakh = 10% tax
    Tax = Rs 40,000 (10% of Rs 4 lakh)
    So, total tax before rebate = Rs 60,000

However, under Section 87A, if your taxable income is up to Rs 12 lakh, you get a rebate equal to the entire tax payable. In this case, the total tax before rebate was Rs 60,000. The rebate cancels out the tax completely, so the final tax payable is Rs 0.

What happens if you earn more than Rs 12 lakh?

The rebate is only applicable if taxable income is Rs 12 lakh or below. If you earn Rs 12.01 lakh, even Rs 100 extra, you lose the rebate completely. You will have to pay tax as per the slabs without any rebate.

This new tax structure is a big relief for middle-class taxpayers. The government is essentially giving a full tax waiver for incomes up to Rs 12 lakh, making the new tax regime more attractive for salaried individuals.
 

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Updated 16:35 IST, February 1st 2025