Union Budget 2025: No Income Tax Payable on Income Up to ₹12 Lakh Under New Tax Regime, Standard Deduction Unchanged

On February 1, 2025, Finance Minister Nirmala Sitharaman presented the Union Budget 2025-26, unveiling significant tax reforms that aim to provide relief to the middle class. A much-anticipated announcement was made regarding income tax exemptions under the new tax regime.

The Finance Minister confirmed that no income tax will be payable for annual incomes of up to ₹12 lakh under the new tax structure. This decision is set to put more money in the hands of taxpayers, contributing to household consumption, savings, and investment, as per Sitharaman’s speech.

New vs Old Tax Regime (FY 2025-26)

New Tax Regime (FY 2025-26)

• Income up to ₹4 lakh is tax-free.
• Tax rates start at 5% for income above ₹4 lakh and gradually increase.
• The highest tax rate of 30% applies to income above ₹24 lakh.
• Salaried individuals can claim a standard deduction of ₹75,000, effectively making incomes up to ₹12.75 lakh tax-free.
• This regime aims to reduce the tax burden and increase disposable income.

Old Tax Regime (FY 2025-26)

• Income up to ₹2.5 lakh is tax-free.
• 5% tax applies between ₹2.5 lakh and ₹5 lakh.
• 20% tax applies between ₹5 lakh and ₹10 lakh.
• The highest tax rate of 30% applies to income above ₹10 lakh.
• Allows various deductions and exemptions, which can lower taxable income.

Key Differences

• The new regime offers a higher tax-free threshold (₹4 lakh vs ₹2.5 lakh).
• Higher-income taxpayers benefit more from the old regime due to deductions.
• The new regime simplifies tax calculation but removes deductions available in the old regime.
• Salaried taxpayers benefit from the ₹75,000 standard deduction under the new regime.

Section 87A Rebate Changes: A Boost for Lower-Income Taxpayers?

Under the new tax regime, a Section 87A rebate is available for those with an annual income of up to ₹7,00,000. This rebate allows for a reduction of up to ₹25,000 from the total tax payable. For those in the old tax regime, the rebate is ₹12,500, but only for individuals earning up to ₹5,00,000. With the increase in the income threshold for this rebate in the new tax regime, lower-income taxpayers will benefit from reduced tax liabilities, further supporting the middle class.

A Step Towards Boosting Middle-Class Spending

The budget announcement made by FM Nirmala Sitharaman is expected to be a catalyst for the economy. By reducing taxes for the middle class and giving them more disposable income, the government hopes to stimulate consumption, which will, in turn, fuel growth in various sectors. More disposable income means higher spending power, which could benefit industries such as retail, real estate, and consumer goods.

Conclusion

With these changes, the government is not only focusing on short-term benefits but also creating a framework for long-term economic stability. By leaving more money in the pockets of taxpayers, the Union Budget 2025-26 aims to create a beneficial cycle of consumption and investment, helping to sustain India’s growth trajectory for years to come.

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