Union Budget 2025: Why Rs 12L earners won’t pay tax despite the 10% slab—here’s how

Guwahati, Feb 1: The Union Budget 2025 has introduced new tax slabs, raising confusion about - Why do individuals earning Rs 12 lakh annually pay no tax, despite falling within the 10% slab?

At first glance, the new tax slabs suggest that individuals earning Rs 12 lakh should be taxed at 10%. However, thanks to a rebate under Section 87A, they pay nothing at all.

Section 87A provides a tax rebate that effectively cancels out the tax liability for individuals earning up to Rs 12 lakh. This means that despite the applicable tax slabs, the final tax payable is reduced to zero.

First, let's know the new tax slabs:

• Up to Rs 4 lakh – No tax
• Rs 4 lakh - Rs 8 lakh – 5%
• Rs 8 lakh - Rs 12 lakh – 10%
• Rs 12 lakh - Rs 16 lakh – 15%
• Rs 16 lakh - Rs 20 lakh – 20%
• Rs 20 lakh - Rs 24 lakh – 25%
• Above Rs 24 lakh – 30%

To understand how this plays out, consider someone earning Rs 13 lakh annually. Since the rebate applies only up to Rs 12 lakh, tax is charged only on the excess Rs 1 lakh. Here’s how the tax would be calculated:

Rs 1 lakh above Rs 12 lakh (see slabs) taxed at 15% → Rs 15,000

Rs 8-12 lakh slab taxed at 10% → Rs 40,000

Rs 4-8 lakh slab taxed at 5% → Rs 20,000

Total Tax Payable: Rs 75,000

For individuals earning Rs 12 lakh or less, the Section 87A rebate ensures they pay zero tax, despite the slabs suggesting otherwise.

Finance Minister Nirmala Sitharaman also announced tax reforms. Here’s a detailed look:

NSS withdrawals made tax-free

A significant relief comes in the form of tax exemption on withdrawals from the National Savings Scheme (NSS) for individuals withdrawing funds on or after August 29, 2024.

Sitharaman pointed out that many senior citizens hold old NSS accounts, which no longer generate interest. This move ensures that they do not face any tax burden when withdrawing their funds, effectively making their long-term savings more accessible.

Higher TDS exemption limit for rent – now Rs 6 Lakh

The government has raised the annual TDS exemption limit on rent from Rs 2.40 lakh to Rs 6 lakh. This means that landlords who earn up to Rs 6 lakh annually in rental income will no longer have to worry about tax deductions at source (TDS).

This is expected to significantly reduce compliance burdens and benefit small landlords who rely on rental income.

Increased tax deduction limit for senior citizens

For senior citizens, the tax deduction limit on interest income has been doubled from Rs 50,000 to Rs 1,00,000. This means that those relying on fixed deposits, savings accounts, or other interest-bearing instruments will now be able to earn up to Rs 1 lakh in interest without having to pay any tax on it.

A simpler, more transparent tax system – the New Income Tax Bill

One of the most notable announcements in Budget 2025 is the proposal for a New Income Tax Bill, which aims to overhaul the tax system by:

• Reducing complexity: The new bill will reportedly cut down the existing tax law by half in terms of chapters and words.
• Enhancing clarity: By making tax provisions simpler and more direct, the government aims to reduce litigation and ensure greater certainty for taxpayers.
• Easing compliance: With clearer rules, both taxpayers and tax administrators will benefit from a more straightforward tax system.

Key announcements

• Higher Standard Deduction: Salaried taxpayers now benefit from a standard deduction of Rs 75,000, effectively making the tax-free threshold Rs 12.75 lakh under the new regime.
• Rationalisation of TDS Rates: The Finance Minister has proposed reducing the number of TDS rates and increasing threshold amounts for better clarity and uniformity.

With these reforms, the government is signaling a move towards a simpler, fairer, and more transparent taxation system.