Understanding the New Income Tax Regime Under the Union Budget 2025

 Understanding the New Income Tax Regime Under the Union Budget 2025

In the Union Budget 2025, Finance Minister Nirmala Sitharaman introduced a significant change to the New Tax Regime (NTR), which impacts how income tax is calculated for individuals in India. Among the most notable changes is the removal of income tax for those earning up to ₹12 lakh annually, offering taxpayers a potential tax-free year. However, the introduction of new tax slabs with equal intervals of ₹4 lakh raises important questions about the structure of the tax system and the implications for taxpayers.

 Key Highlights of the New Tax Regime (NTR) 2025

The finance minister made some key announcements about the NTR, including:

1. No Tax Up to ₹12 Lakh: Individuals earning up to ₹12 lakh annually will not pay any tax under the NTR. This figure is extended to ₹12.75 lakh for salaried individuals after factoring in a standard deduction of ₹75,000.

2. Tax Slabs: The new NTR tax slabs were redesigned with intervals of ₹4 lakh, as follows:

Income Range	Tax Rate	Tax Payable
₹0 - ₹4 lakh	Nil	No tax
₹4 lakh - ₹8 lakh	5%	₹20,000
₹8 lakh - ₹12 lakh	10%	₹40,000
₹12 lakh - ₹16 lakh	15%	₹60,000
₹16 lakh - ₹20 lakh	20%	₹80,000
₹20 lakh - ₹24 lakh	25%	₹1,00,000
Above ₹24 lakh	30%	Tax calculated on income exceeding ₹24 lakh

The important question is: If there is no tax for income up to ₹12 lakh, why are there tax slabs? Let's break this down.

Why Have Slabs at All?

The first obvious question is why the slabs are structured this way when there's already a ₹12 lakh income threshold where no tax applies. Here's the explanation:

1. Standard Deduction: Under the NTR, a standard deduction of ₹75,000 is available to salaried taxpayers. So, while the first ₹12 lakh of income may not be taxed, the standard deduction reduces the taxable income, bringing the effective income tax threshold for salaried individuals to ₹12.75 lakh.

2. Rebate Under Section 87A: For those whose total taxable income is ₹12 lakh or less, there is also a rebate of ₹60,000 available under Section 87A. This rebate functions like a "discount" on the tax payable and brings the overall tax burden to zero if the income is within this range. However, once your income crosses ₹12 lakh, you cannot avail of this rebate, and that's where the slabs come into play.

Tax Calculation: How Does It Work?

Let’s break down the process of calculating tax for someone earning ₹12,10,000 annually:

- Income: ₹12,10,000

- Standard Deduction: ₹75,000

- Taxable Income: ₹12,10,000 - ₹75,000 = ₹11,35,000

At this point, the income falls into the ₹8 lakh - ₹12 lakh slab, where the tax rate is 10%. Thus, the tax payable would be:

- Tax on ₹8 lakh to ₹12 lakh: ₹40,000 (10% of ₹4 lakh)

- Total tax before rebate: ₹40,000

Now, the taxpayer can avail of the ₹60,000 rebate under Section 87A, reducing the tax payable to zero.

However, if a person’s taxable income exceeds ₹12 lakh, as in the case of an income of ₹12,10,000, they will not get the benefit of the rebate. In such cases, the tax payable will increase significantly.

Marginal Relief for Taxpayers Above ₹12 Lakh but Below ₹12.75 Lakh

To address the anomaly where small increases in income above ₹12 lakh could result in disproportionately high taxes, the government introduced marginal relief. 

For instance, if your taxable income is ₹12,10,000, you would have to pay a tax of ₹61,500 (after applying the 10% tax on ₹4 lakh). However, because your income is only marginally above ₹12 lakh, you can claim marginal relief, which reduces the tax burden. The relief is calculated as the excess income over ₹12 lakh (₹10,000) subtracted from the total tax liability. 

Here’s the breakdown:

- Tax payable without marginal relief: ₹61,500

- Excess income over ₹12 lakh: ₹10,000

- Marginal relief: ₹51,500 (₹61,500 - ₹51,500)

- Final tax payable: ₹10,000

Thus, if your taxable income is just above ₹12 lakh but below ₹12.75 lakh, you are only required to pay ₹10,000 in tax instead of ₹61,500, thanks to marginal relief.

Rebate and Taxable Income Beyond ₹12.75 Lakh

If the taxable income exceeds ₹12.75 lakh, neither the rebate nor marginal relief will apply, and the individual will pay taxes as per the standard slabs, starting from the 15% tax rate for income between ₹12 lakh and ₹16 lakh.

The Effect of New Tax Regime on Taxpayers

The new tax regime aims to simplify tax calculations and remove the burden of numerous deductions and exemptions that were available under the old regime. For those with income up to ₹12 lakh, this move is advantageous since they will no longer need to pay any taxes or file lengthy documentation to claim exemptions. However, the marginal relief and the rebate system will add a layer of complexity for those whose taxable income exceeds ₹12 lakh but stays below ₹12.75 lakh.

Conclusion

The revamped tax slabs under the New Tax Regime in the Union Budget 2025 offer several advantages, especially for middle-income taxpayers, making it easier for them to manage their tax liabilities. While the no-tax limit up to ₹12 lakh is a major benefit, the introduction of slabs at intervals of ₹4 lakh provides a more structured tax regime, catering to a broader range of income earners. For those earning slightly above ₹12 lakh, the rebate and marginal relief provisions ensure that the tax burden does not increase drastically. 

This simplification in tax structure is a welcome change, especially for salaried taxpayers and those who prefer a straightforward tax calculation without the complexity of exemptions.