What is the Rs 12 Lakh Exemption and Its Impact on Tax Calculation for Higher Incomes
New Delhi, Feb 01, 2025
In a bold move aimed at increasing disposable incomes and stimulating economic growth, Finance Minister Nirmala Sitharaman introduced a revamped income tax structure in the Budget 2025-26. One of the headline features of this overhaul is the Rs 12 lakh income exemption, which has generated considerable discussion among taxpayers and financial experts alike. This comprehensive analysis explains what the Rs 12 lakh exemption entails, how tax is calculated under the new regime for higher incomes, and what this means for salaried individuals.
The Rs 12 Lakh Exemption Explained
At the heart of the new tax structure is the Rs 12 lakh income exemption. For taxpayers earning up to Rs 12 lakh annually, no income tax will be levied. However, it is crucial to note that this figure refers to the taxable income after deductions. In practice, a standard deduction of Rs 75,000 is also available under the new regime, effectively raising the exemption threshold to Rs 12,75,000. This measure is designed to provide significant relief to lower and middle-income earners, ensuring that a larger segment of the population benefits from tax-free income.
This exemption is part of a broader strategy to boost domestic consumption and savings. By reducing the tax burden on individuals with modest incomes, the government aims to enhance consumer spending, which is a key driver of economic growth.
How the New Tax Regime Works
For individuals whose annual incomes exceed Rs 12 lakh, the new tax regime does not simply tax the amount over Rs 12 lakh at a flat rate. Instead, the income is segmented into multiple slabs, each subject to a different tax rate. This progressive tax system is structured as follows:
- Up to Rs 4 lakh: No tax is levied.
- Rs 4 lakh to Rs 8 lakh: Income in this bracket is taxed at 5%.
- Rs 8 lakh to Rs 12 lakh: Income falling in this range is taxed at 10%.
- Rs 12 lakh to Rs 16 lakh: The applicable tax rate is 15%.
- Rs 16 lakh to Rs 20 lakh: A rate of 20% applies.
- Rs 20 lakh to Rs 24 lakh: Income in this slab is taxed at 25%.
- Above Rs 24 lakh: Any income exceeding this threshold is taxed at 30%.
This graduated structure ensures that taxpayers are not burdened with a flat rate on their entire income, but rather, each portion of income is taxed according to its bracket.
A Closer Look: Tax Calculation for Higher Income Brackets
To illustrate how this works in practice, consider a salaried individual earning Rs 15 lakh annually after the standard deduction. Despite the appealing Rs 12 lakh exemption for those earning up to this limit, a person with a Rs 15 lakh income is subject to taxation across various slabs.
Here’s how the breakdown works:
- First Rs 4 Lakh – Zero Tax:
The initial Rs 4 lakh of income is exempt from tax. - Next Rs 4 Lakh (Rs 4-8 Lakh) – 5% Tax:
The income between Rs 4 lakh and Rs 8 lakh is taxed at 5%, resulting in a tax of Rs 20,000 (5% of Rs 4 lakh). - Following Rs 4 Lakh (Rs 8-12 Lakh) – 10% Tax:
The next Rs 4 lakh, spanning Rs 8 lakh to Rs 12 lakh, is taxed at 10%, which comes to Rs 40,000. - Remaining Rs 3 Lakh (Rs 12-15 Lakh) – 15% Tax:
The residual Rs 3 lakh falls into the Rs 12-16 lakh bracket, attracting a 15% tax rate and adding Rs 45,000 to the liability.
When these amounts are summed, the total tax liability for an annual income of Rs 15 lakh is Rs 1,05,000.
The Role of Tax Rebates
A notable aspect of the new regime is the introduction of tax rebates, especially for those whose income levels make them eligible for complete tax relief. For individuals earning exactly Rs 12 lakh, the slab-based calculation would theoretically result in a tax liability of Rs 60,000:
- Rs 0 for the first Rs 4 lakh,
- Rs 20,000 for the Rs 4-8 lakh bracket, and
- Rs 40,000 for the Rs 8-12 lakh segment.
However, the government offers a full rebate of Rs 60,000 for incomes up to Rs 12 lakh. This rebate effectively nullifies the tax liability, meaning that such taxpayers end up paying zero tax on their income. This benefit is a key element of the government’s strategy to provide fiscal relief to a broader section of the populace.
Comparing with the Previous Tax Structure
Under the earlier tax regime, although taxpayers could claim various deductions and exemptions, the effective tax rates were higher, especially for incomes exceeding certain thresholds. For instance, under the old rules, income above Rs 10 lakh was generally subject to a 30% tax rate. This meant that a taxpayer with an annual income of Rs 15 lakh could face a considerably higher tax burden than under the new slab system.
Comparative analyses indicate that for a person earning Rs 15 lakh:
- Under the Old Regime: The tax liability was significantly higher, potentially reaching Rs 2,62,500, depending on the exemptions and deductions claimed.
- Under the New Regime: The calculated tax liability of Rs 1,05,000 demonstrates a clear reduction in tax, thereby offering relief amounting to a reduction of tens of thousands of rupees.
The improved relief under the new tax structure not only helps in increasing disposable income but also makes tax planning more predictable for salaried individuals and other taxpayers.
Broader Implications and Expert Opinions
Experts believe that the revised tax structure will have several positive effects on the economy. By allowing individuals with incomes up to Rs 12 lakh to retain a larger share of their earnings, the policy is expected to boost consumer spending—a critical factor for economic recovery and growth. Moreover, the slab-based approach ensures fairness, as higher-income earners contribute proportionally more to the exchequer.
Financial advisors suggest that taxpayers assess their individual financial profiles to determine whether the new regime or the old system—with its allowances and exemptions—best suits their needs. This decision will depend on various factors, including total income, investments, and other eligible deductions.
The introduction of the Rs 12 lakh exemption under the new tax regime represents a significant policy shift in India’s approach to taxation. While it offers full tax relief for incomes up to Rs 12 lakh (effectively Rs 12,75,000 after standard deduction), those with higher incomes will still be subject to a progressive, slab-wise tax system. For example, a salaried individual earning Rs 15 lakh annually will face a tax liability of Rs 1,05,000, determined by the application of varying tax rates across different income slabs.
As the nation navigates this transition, both taxpayers and financial experts are keenly watching the outcomes. With the promise of reduced tax burdens for millions and an increased focus on equitable taxation, the Budget 2025-26 reforms are set to redefine India’s fiscal landscape in the coming years. Stay tuned for further updates and in-depth analyses as the new regime is implemented.