Finance Minister Smt. Nirmala Sitharaman, in her budget speech on February 1, 2025, introduced significant revisions to the income tax structure for the financial year 2025-26. As per the new tax regime, income up to ₹12 lakh will be tax-free. Additionally, the basic exemption limit has been increased from ₹3 lakh to ₹4 lakh, providing further relief to taxpayers.
Is income tax-free up to ₹4 lakh or ₹12 lakh?
After this announcement, taxpayers are confused about whether the tax-free income limit is ₹4 lakh or ₹12 lakh. Let’s understand this in simple terms —
- Income up to ₹4 lakh is entirely tax-free – This means there will be no tax calculation at all on income up to ₹4 lakh.
- Income up to ₹12 lakh is tax-free due to rebate under Section 87A – Tax will be calculated as per slabs, but a rebate under Section 87A will make the final tax liability zero.
Before understanding statement of 12 lakh tax free, let’s first understand new tax slab under new tax regime
New Tax Slab (Revised) 2025-26
| Income Limit (₹) | Tax Rate (%) |
|---|---|
| 0 to 4 lakh | 0% |
| 4 to 8 lakh | 5% |
| 8 to 12 lakh | 10% |
| 12 to 16 lakh | 15% |
| 16 to 20 lakh | 20% |
| 20 to 24 lakh | 25% |
| More than 24 lakh | 30% |
For eg : A salaried person’s income is ₹30 lakh, the tax calculation will be as follows:
A person’s income comes from salary or pension, they will also get the benefit of a ₹75,000 standard deduction, so now taxable income will be 29.25 lakh .
| Income Limit | Tax Rate (%) | Tax Value |
|---|---|---|
| Up to ₹4 lakh | 0% | 0 |
| ₹4 lakh to ₹8 lakh | 5% | 20000 |
| ₹8 lakh to ₹12 lakh | 10% | 40000 |
| ₹12 lakh to ₹16 lakh | 15% | 60000 |
| ₹16 lakh to ₹20 lakh | 20% | 80000 |
| ₹20 lakh to ₹24 lakh | 25% | 100000 |
| More than ₹24 lakh | 30% | 157500 |
So Finally tax for 30 lakh earning person would be Rs 4,57,500.
Now let us understand statement of 12 lakh tax free.
Income up to ₹12 lakh is technically taxable, but it becomes tax-free due to the rebate provided under Section 87A. This provision ensures that if an individual’s total taxable income does not exceed ₹12 lakh, the calculated tax is entirely nullified by the rebate, reducing the final tax liability to zero. As a result, taxpayers can save approximately ₹60,000 in taxes.
Now, the real confusion arises—what happens if a person earns just slightly above ₹12 lakh? Will they still get the rebate, or will they have to pay the full tax on their income?
The good news is that income tax laws provide a solution to this issue through marginal relief. This provision ensures that if a taxpayer’s income marginally surpasses the rebate threshold, the additional tax payable does not exceed the extra income earned beyond ₹12 lakh.
Example of Marginal Relief
Let’s say there is a rebate under Section 87A, making business income up to ₹12 lakh effectively tax-free. If a person’s business taxable income is ₹12,01,000, they would ordinarily lose the entire rebate and be liable to pay full tax. However, with marginal relief, the additional tax is capped so that it does not exceed the extra ₹1,000 earned beyond ₹12 lakh.
Another Example: Salary/Pension Income
If a person has a salary or pension income of ₹13 lakh, the tax calculation would be:
- Total Income: ₹13,00,000
- Less: Standard Deduction: ₹75,000
- Taxable Income: ₹12,25,000
- Tax Without Marginal Relief: ₹63,750
- Tax Payable After Marginal Relief: ₹25,000
Here, instead of paying ₹63,750 in tax, the individual benefits from marginal relief, capping the tax liability to just ₹25,000—the excess income above ₹12 lakh.
How Much Marginal Relief is Available?
Marginal relief is applicable up to:
- ₹12.75 lakh for business income
- ₹13.5 lakh for salaried/pension income
Beyond these limits, the standard tax calculation will apply.
Video credit : Mint youtube channel
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Very nice clarity about tax calculation. Actually marginal relief plays valuable role. In my observation or opinion there are some tax relief for all.
Nice, Very well explained