Budget 2025 makes income up to Rs 12 lakh tax-free

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Finance Minister Nirmala Sitharaman on Saturday proposed significant changes in the tax rates and slabs under the new tax regime.

Budget 2025 makes income up to Rs 12 lakh tax-free

Increasing the tax rebate from the existing threshold of Rs 7 lakh to Rs 12 lakh is a master stroke by the government, as this benefits almost 85% of existing tax payers. (Image: Freepik)

In an effort to boost consumption and put more money in the hands of taxpayers, Finance Minister Nirmala Sitharaman on Saturday proposed significant changes in the tax rates and slabs under the new tax regime. With these changes, income up to Rs 12 lakh (excluding capital gains) will now be tax-free, significantly reducing the financial burden on the middle class.

In her budget speech, the FM said, “There will be no income tax payable upto 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 tax payers, due to standard deduction of Rs 75,000.”

With the standard deduction of Rs 75,000, thus, your tax-free income can potentially reach Rs 12.75 lakh, which provides significant relief for middle-income earners, as it effectively increases the threshold for tax-free earnings.

Tax experts said increasing the tax rebate from the existing threshold of Rs 7 lakh to Rs 12 lakh is a master stroke by the government, as this benefits almost 85% of existing tax payers comprising self-employed, small business and salaried class.

In the new tax regime, the Finance Minister also proposed to revise tax rate structure as follows:

The total tax benefit of slab rate changes and rebate at different income levels can be illustrated in the table below:

“Widening the tax slabs and expanding the limit of maximum tax rate of 30% on income above Rs 24 lakh, as against the current limit of Rs 15 lakh under new tax regime and Rs 10 lakh under the old tax regime, is an added boost and ensures more net-in-hand income for this segment,” said Akhil Chandna, Partner, Global People Solutions Leader, Grant Thornton Bharat.

Adhil Shetty, CEO, BankBazaar.com, said the income tax reforms introduced in the budget are among the biggest in the last decade — simplified and rationalized to put more money in people’s hands without compromising the fiscal deficit.

“The most important change has been the revision of the tax slabs keeping in line with inflation. This has been a long-standing request of the tax payers for the last so many years. In the updated tax reforms, with slabs adjusted for inflation, the 30% tax rate is now applicable above Rs 24 lakh, up from the initial Rs 15 lakh. This change in the 30% slab marks a 60% adjustment,” added Shetty.

For higher earners, there is substantial relief going up to Rs 10,400 per month in higher disposable income. In the updated tax reforms, with slabs adjusted for inflation, the 30% tax rate is now applicable above Rs 24 lakh, up from the initial Rs 15 lakh. This change in the 30% slab marks a 60% adjustment. Under the proposed 2025 tax regime, someone earning Rs 25 lakh annually will pay Rs 3.43 lakh in total tax, compared to Rs 4.57 lakh under the 2024 regime.

“This rationalisation of income tax has been long-awaited and will go a long way in reaffirming the confidence of the people in the economy. More cash in hand will also mean increased spending, which will drive higher consumption and, in turn, will fuel economic growth,” said Shetty.

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