The Union Budget 2025 is making headlines with its transformative approach to personal income tax, designed to relieve the middle class and simplify tax compliance. With no income tax charged on earnings up to ₹12 lakh under the new regime, the latest budget announcement by Finance Minister Nirmala Sitharaman promises a significant boost for taxpayers, easing financial pressure while encouraging greater household spending, savings, and investments.
“For taxpayers with income up to ₹12 lakh (other than special income like capital gains), tax rebate is being provided, so no tax is payable.”– Finance Minister Nirmala Sitharaman
This landmark move is not only aimed at providing immediate relief to millions of taxpayers but also represents a broader effort to overhaul and simplify the existing tax structure. Let’s dive into the key aspects of Budget 2025, understand the revised tax slabs, and learn how these changes can impact individuals across different income groups.
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A Closer Look at the New Tax Regime
Under the newly announced tax regime, the government has set a zero-income tax threshold for incomes up to ₹12 lakh. This means that taxpayers who earn up to ₹12 lakh per annum will enjoy the benefit of not paying any income tax. The decision has been warmly welcomed by the public and has been a subject of much discussion among financial experts.
The revised tax slabs under the new regime are structured as follows:
- Income up to ₹4 lakh: No tax
- Income between ₹4 lakh and ₹8 lakh: 5% tax
- Income between ₹8 lakh and ₹12 lakh: 10% tax
- Income between ₹12 lakh and ₹16 lakh: 15% tax
- Income between ₹16 lakh and ₹20 lakh: 20% tax
- Income between ₹20 lakh and ₹24 lakh: 25% tax
- Income above ₹24 lakh: 30% tax
Despite these detailed rates, the introduction of a tax rebate effectively cancels out any tax liability for individuals earning up to ₹12 lakh. Essentially, while the slabs mention a nominal tax rate for incomes between ₹4 lakh and ₹12 lakh, the rebate works in such a way that the net tax burden for these taxpayers remains zero.
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How the Tax Rebate Works
For example, consider an individual with an annual income of ₹12 lakh. Under the detailed tax breakdown:
- No tax is levied on the first ₹4 lakh.
- The next ₹4 lakh (from ₹4 lakh to ₹8 lakh) is taxed at 5%, resulting in a nominal tax of ₹20,000.
- The following ₹4 lakh (from ₹8 lakh to ₹12 lakh) is taxed at 10%, adding a further ₹40,000 in tax.
In total, the nominal tax calculated would be ₹60,000. However, the rebate offered by the government nullifies this amount, meaning that taxpayers in this income bracket do not actually have to pay any tax. This effectively ensures that no individual earning up to ₹12 lakh is burdened by income tax under the new regime.
“This structure is set to substantially reduce the tax burden on the middle class and leave more money in their hands.”
– Union Budget 2025 Announcement
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Impact on Different Income Groups
The new tax regime is designed with a focus on the middle class, but its implications extend to various income groups. Let’s break down how different brackets are affected:
For Lower Income Earners:Taxpayers earning up to ₹12 lakh enjoy the full benefit of the tax rebate. Even though the slabs show rates for income segments from ₹4 lakh to ₹12 lakh, the rebate ensures that the net payable tax is zero. This is a welcome relief for a large section of the population who can now allocate these funds toward essential needs and future savings.
For Middle Income Earners Beyond ₹12 Lakh: Individuals whose incomes exceed ₹12 lakh start paying tax on the amount above this threshold. For instance, a person earning ₹16 lakh would calculate tax only on the ₹4 lakh surplus over ₹12 lakh, along with the nominal tax applicable in the lower slabs which is nullified by the rebate for the first ₹12 lakh. This means that the effective tax is only levied on the income beyond the tax-free limit, ensuring a fair and gradual increase in tax liability.
For High Income Earners: Taxpayers with incomes above ₹24 lakh are subject to the highest tax rate of 30% on the income exceeding this limit. While the rebate does not extend to them beyond ₹12 lakh, the structured and transparent slabs ensure that the tax system remains progressive and equitable.
Additional Tax Reforms and Simplifications
Budget 2025 is not just about revising the tax slabs. The government has proposed several other measures aimed at simplifying the overall tax system and enhancing compliance:
Rationalisation of TDS Rates: The rates for Tax Deduction at Source (TDS) will be revisited to better reflect current economic conditions and to ensure fairness for taxpayers.
Enhanced Benefits for Senior Citizens: The limit for TDS deductions applicable to senior citizens has been doubled to ₹1 lakh, offering additional financial relief to the older populati
Extended Deadline for Updated Returns: Taxpayers now have an extended window of four years to file updated returns, making it easier for individuals to comply with tax regulations without the pressure of a stringent deadline.
Introduction of a New Direct Tax Code: The Finance Minister hinted at the upcoming introduction of a new direct tax code, which is expected to replace the 1961 Income Tax Act. This new code aims to simplify tax compliance by reducing the complexity and length of the current law. One of the significant anticipated changes includes scrapping the outdated concept of a financial year (FY) versus an accounting year (AY), thereby reducing confusion. There is also discussion around the possibility of introducing a uniform 5% tax on income from insurance policies, a move that would standardise and simplify the tax on dividend income.
“The new direct tax code is expected to make the current tax laws simpler, more transparent, and easier for individual taxpayers to understand.”– Sources Confirming Budget Reforms
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Benefits for the Economy and Taxpayers
The measures introduced in Budget 2025 are not merely adjustments on paper; they have real-world benefits for the economy:
Boosting Disposable Income: By eliminating tax liability for incomes up to ₹12 lakh, a significant portion of the population will have more money at their disposal. This boost in disposable income is likely to translate into increased consumer spending, which in turn can drive economic growth.
Enhancing Savings and Investments: With more money in hand, households are better positioned to save and invest, potentially leading to long-term financial stability and economic resilience.
Simplification and Transparency: The introduction of a simplified tax code and the rationalisation of TDS and other tax mechanisms will make it easier for taxpayers to understand their obligations, reducing errors and increasing compliance.
Focused Support for the Middle Class: The middle class forms the backbone of the country’s economy. By targeting relief towards this group, the government is reinforcing its commitment to empowering a large segment of the population, ensuring that more funds remain within households to circulate in the economy.
