The Indian government has introduced a significant change in the new tax regime, making annual income up to Rs 12 lakh tax-free. Previously, income up to Rs 7 lakh was exempt from tax under Section 87A, which provided a rebate of Rs 25,000. With this update, the rebate has now been increased to Rs 60,000, ensuring that individuals earning up to Rs 12 lakh do not have to pay any income tax.
A Historic Tax Reform for the Middle Class
Many are calling this a historic move for the middle class, as it was an unexpected and significant reform in income tax policy. While this revision is expected to cost the government an additional Rs 1 lakh crore annually, taxpayers will benefit immensely. The government anticipates that the extra liquidity in the system will boost spending and economic growth.
New Income Tax Slabs for 2025
The new tax slabs introduced in Budget 2025 are as follows:
- 0 – Rs 4 lakh: 0%
- Rs 4 – 8 lakh: 5%
- Rs 8 – 12 lakh: 10%
- Rs 12 – 16 lakh: 15%
- Rs 16 – 20 lakh: 20%
- Rs 20 – 24 lakh: 25%
- Above Rs 24 lakh: 30%
Under this new tax structure, any income above Rs 4 lakh is subject to taxation. However, Section 87A provides a rebate of up to Rs 60,000, ensuring no tax liability for those earning up to Rs 12 lakh. Additionally, salaried individuals benefit from a standard deduction of Rs 75,000, effectively making income up to Rs 12.75 lakh completely tax-free.
The Impact of Marginal Relief
A key concern arises when income exceeds Rs 12.75 lakh. For instance, if a person earns Rs 12.76 lakh, even though their income has increased by just Rs 1,000, they would be liable to pay Rs 62,556 in taxes according to the new slab. This creates an unfair scenario where a minimal income increase results in a disproportionately high tax liability.
To address this, the Marginal Relief Rule has been implemented. This rule ensures that the tax payable does not exceed the additional income earned. In this case, since the incremental income is only Rs 1,000, the taxpayer will be required to pay just Rs 1,000 in tax instead of Rs 62,556.
How Marginal Relief Works
Marginal relief applies to cases where a small increase in income leads to an excessively high tax liability. According to this rule, the tax payable will be whichever is lower between:
- The total tax calculated under the new tax slab
- The amount of incremental income
For example:
- Income of Rs 12.76 lakh: Tax payable = Rs 1,000 (since incremental income is Rs 1,000)
- Income of Rs 13 lakh: Tax payable = Rs 25,000
- Income of Rs 13.25 lakh: Tax payable = Rs 50
Marginal Relief Cap
Under the New Tax Regime 2025, marginal relief is available for up to Rs 60,000. Once the incremental income equals the calculated tax, the relief no longer applies. Beyond this point, full tax liability comes into effect.
Conclusion
The revised tax structure and marginal relief provision offer significant benefits to taxpayers, especially those with income close to the exemption limit. By ensuring fair taxation, the government aims to make the tax system more equitable while boosting overall spending in the economy. These changes indicate a clear shift towards making the new tax regime the default system, potentially phasing out the old tax regime in the future.
