On February 1, 2025, in her 74-minute Union Budget speech, Finance Minister Nirmala Sitharaman said there will be no tax on income up to ₹12,00,000 per annum, under the New Tax Regime (NTR).
Factoring in Standard Deduction of ₹75,000, this limit would be extended to ₹12,75,000 per annum for salaried taxpayers.
On top of it, Ms. Sitharaman also rejigged the slabs in equal intervals of ₹4 lakh between each slab. The slabs are ₹0-4 lakh (Nil), ₹4-8 lakh (Tax 5% — ₹20,000), ₹8-12 lakh (10% — ₹40,000), ₹12-16 lakh (15%), ₹16-20 lakh (20%), ₹20-24 lakh (25%) and above ₹24 lakh (30%). So, if income is ₹12.10 lakh, tax will be (₹60,000+₹1,500 viz. 15% of ₹10,000).
New tax rate category
Additionally, she introduced a fresh 25% tax rate category, which was not available in the previous financial year.
As per previous year slabs, after 20% category the next category was 30%.
Now, this extended tax limit benefit is available only for those who choose the NTR. Whether to choose Old Tax Regime or New Tax Regime is purely a matter of choice and goal, which we covered earlier in our Moneywise column dated February 17.
Coming back to NTR slabs. It would be quite natural to ask if no tax is levied up to an income of ₹12,00,000 why only the slab ₹0-4 lakh shows NIL tax. Further, for income from ₹4-12 lakh, there is a corresponding tax rate of 5% to 10% in the respective columns. The question arising here is do you need to pay 5% tax (₹4-8 lakh category) if your salary is, say ₹5.5 lakh per annum!
Nay. For clarity’s sake, let’s for some time, keep aside the component of Standard Deduction and consider the slabs alone.
Two components
Going by her Budget announcement, ideally, the first slab and the corresponding income tax rate should have been straight ₹0-12 lakh – NIL, but it’s not and there are other slabs in between, with specific rates. This is because, the calculation of income tax always takes into account two components to derive the final taxable income.
The first component is the simple straight-forward component of Standard Deduction (₹75,000 under NTR), which would shrink the total tax payable amount directly. Next, a slightly complicated component known as rebate, which falls under Section 87A of the Income Tax Act.
You cannot deduct the rebate amount directly from the taxable income as in the case of Standard Deduction. Rebate acts like a discount, provided, your total income satisfies certain criterion.
A ‘discount’ (Rebate) of ₹60,000 is applicable to taxpayers only if the total taxable income is within the stipulated limit of ₹12,00,000. In Budget 2025, the Finance Minister also raised rebate amount from ₹25,000 to ₹60,000, but only for NTR.
In short, if your taxable income is within ₹12,00,000, your tax amount would be ₹60,000 (₹20,000 plus ₹40,000). However, as your income is within the threshold of ₹12,00,000, you can claim the Rebate (discount) of ₹60,000, bringing your net taxable amount to zero [₹60,000 tax minus ₹60,000 Rebate].
So, what if your taxable income crosses the threshold of ₹12,00,000? You cannot claim the Rebate, thereby paying higher tax amount. Suppose let’s say you earn ₹12,10,000 in a year. As the no-tax limit is exceeded by ₹10,000, Rebate is not applicable. For earning ₹10,000 more per annum, you end up paying ₹61,500 (₹20,000 + ₹40,000 + ₹1,500).
But a clarification by the Central Board of Direct Taxes (CBDT) addresses the anomaly by way of providing ‘marginal relief.’ You can claim the ‘marginal relief’ if your taxable income is more than ₹12 lakh but less than ₹12.75 lakh.
In the above example, total tax payable is ₹61,500 without ‘marginal relief’ but with marginal relief, it would be much lower. To calculate marginal relief, deduct the excess amount over no-tax limit (₹10,000) from total tax payable of ₹61,500. Thus, marginal relief would be ₹51,500 and so, the final tax payout would only be ₹10,000 (₹61,500 minus ₹51,500 of marginal relief).
Exceeding limit
What if taxable income exceeds ₹12.75 lakh? Unfortunately, you cannot avail both Rebate and benefit of marginal relief, thus paying more tax. However, if your employer contributes to National Pension Scheme, you can claim the contribution amount under Section 80CCD(2), up to 14% of your basic salary, thus reducing the tax burden. Your contribution to the scheme would not be taken into account.
(The writer is an NISM & CRISIL-certified wealth manager)
Published – April 07, 2025 02:30 am IST
