Finance Minister Nirmala Sitharaman has delivered significant relief to the middle class in the budget. She has effectively made an annual income of up to Rs 12 lakh tax-free.
Janvi | May 12, 2025 |
Know How an Income of Rs 12.75 Lakh Becomes Tax-Free Under the New Tax Regime
Business Desk, New Delhi: Finance Minister Nirmala Sitharaman has delivered significant relief to the middle class in the budget. She has effectively made an annual income of up to Rs 12 lakh tax-free. When including the standard deduction of Rs 75,000, a total income of up to Rs 12.75 lakh will now be tax-free.
Many taxpayers are confused because under the new tax regime, an annual income of Rs 12 lakh still falls within the 10% tax bracket. Let’s clarify how this income becomes tax-free.
Under the current new tax regime, no tax is charged on income from 0 to 4 lakh rupees. Income between 4-8 lakh rupees is taxed at 5%, and income between 8-12 lakh rupees faces a 10% tax. The highest tax rate of 30% applies to annual income exceeding 24 lakh rupees.
The key lies in Section 87A of the Income Tax, which provides a tax rebate. This rebate is Rs 12,500 in the old tax regime and Rs 60,000 in the new tax regime. Simply put, if your tax liability under the new regime is less than Rs 60,000, you don’t need to pay any tax.
Here’s how it works: Income of 0-4 lakhs is already tax-free. For income between 4-8 lakhs, you’re charged 5%, creating a tax liability of Rs 20,000. For the next segment between 8-12 lakhs, you’re charged 10%, adding another Rs 40,000 to your tax bill.
This creates a total tax liability of Rs 60,000 on an annual income of Rs 12 lakh, which is fully covered by the government’s rebate. Add the standard deduction of Rs 75,000, and an annual income up to Rs 12.75 lakh effectively becomes tax-free.
To claim the tax rebate under section 87A, you must file your Income Tax Return (ITR). Once your ITR is processed and approved, the rebate amount will be credited directly to your account.
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