On February 1, 2025, Union Finance and Corporate Affairs Minister Nirmala Sitharaman announced that the nil income tax slab would be increased to Rs 12 lakh under the new tax regime.
“..there will be no income tax payable up to income of Rs 12 lakh under the new regime. This limit will be Rs 12.75 lakh for salaried taxpayers, due to the standard deduction of Rs 75,000,” Sitharaman stated in her eighth consecutive Union Budget speech.
Her announcement has caused confusion among taxpayers, with many assuming that those earning up to ₹12 lakh are completely exempt from tax. Another common question is whether a salaried person earning ₹13 lakh will only be taxed on the additional ₹1 lakh.
Proposed tax slabs and what they mean
The structure of the new tax regime is as follows:
Income | Tax Rate |
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 |
Most importantly, the “12 lakh nil slab” (exempt from tax through rebates and lower tax rates) applies only to those who have opted for the new tax regime.
It is also important to note that the basic tax slab exemption limit has been raised to Rs 4 lakh from the previous Rs 3 lakh. So, if a person’s income falls within an exempt category (below Rs 4 lakh), they won’t pay any tax.
However, if their income falls between Rs 4 lakh and Rs 12 lakh, they will be taxed according to the new tax regime rates mentioned above. But they can still receive a rebate of up to Rs 60,000, which can reduce their final tax liability to zero.
The “₹12 lakh exemption” isn't a full exemption — it's about a tax rebate relief under the new regime, and it only applies to income up to Rs 12 lakh.
Previously, the tax rebate applied up to ₹7 lakh, but it has now been raised to ₹12 lakh, made to ease the tax burden for individuals earning around ₹1 lakh per month, the Finance Minister said.
A tax rebate provides relief to the taxpayer by reducing the amount of tax they owe. It’s the money the government returns to the person, either by reducing their tax bill or by giving them a refund after they’ve already paid.
How is tax calculated for earnings less than Rs 12 lakh?
As per the new regime, if a person earns Rs 10 lakh annually, the tax rebate covers the entire liability.
Total income: Rs 10,00,000
Standard deduction: Rs 75,000
Income after standard deduction = Rs 10,00,000 - Rs 75,000 = Rs 9,25,000
Tax will be calculated on Rs 9,25,000
Rs 0 - Rs 4 lakh: No tax
Rs 4 lakh - Rs 8 lakh: Tax at 5% = Rs 20,000
Rs 8 lakh - Rs 9,25 lakh: Tax at 10% = Rs 12,500
Total Tax Before Rebate = Rs 20,000 + Rs 12,500 = Rs 32,500
After the tax rebate is applied (Section 87A), and since the income after the standard deduction is below Rs 12 lakh, it still is eligible for the ₹60,000 tax rebate.
But since the total tax is Rs 32,500, the full rebate of Rs 32,500 will be applied, reducing the tax liability to zero.
How is tax calculated for earnings more than Rs 12 lakh?
Suppose a person earns Rs 13 lakh annually, here’s how the tax will be calculated:
Total Income: Rs 13,00,000
Standard Deduction: Rs 75,000
Income after standard deduction = Rs 13,00,000 - Rs 75,000 = Rs 12,25,000
Tax will be calculated on Rs 12,25,000
Rs 0 - Rs 4 lakh: No tax
Rs 4 lakh - Rs 8 lakh: Tax at 5% = Rs 20,000
Rs 8 lakh - Rs 12 lakh: Tax at 10% = Rs 40,000
Rs 12 lakh - Rs 12.25 lakh: Tax at 15% = Rs 3,750
This adds up to Rs 63,750. Hence, if a person earns Rs 13 lakh, after applying the Rs 75,000 standard deduction, their final tax payable will be Rs 63,750, since no rebate is available due to their income exceeding Rs 12 lakh.
The old and new tax regime
In the old regime, taxpayers were eligible to claim various deductions and exemptions to reduce their taxable income, such as Investments in Public Provident Fund (PPF), Employees’ Provident Fund (EPF), life insurance premiums, deductions in health insurance premiums, home loan interest, among others.
The old regime’s structure is as follows:
The new tax regime was introduced by Sitharaman in her 2020 Budget speech for the financial year 2021. This system offers lower tax rates but removes or limits most exemptions and deductions like those for investments, insurance premiums, home loan interest, etc.
This system makes it simpler but less flexible for those who want to reduce their taxable income using deductions.
Taxpayers are given the option to choose between these two systems, allowing them to pick the one that maximises their savings.