In a bid to provide relief to taxpayers, Finance Minister Nirmala Sitharaman's Union Budget 2025 has revised the income tax slabs and enhanced the tax rebate for individuals, particularly benefiting those earning up to Rs 12 lakh annually. Here’s how the new tax structure works and why those earning below Rs 12 lakh now have a nil tax liability.

This new structure is designed to ease the tax burden, especially for middle-income taxpayers.

Tax rebate for income up to Rs 12 lakh:

For individuals with a net taxable income of Rs 12 lakh or less, the Finance Minister has introduced an income tax rebate under Section 87A. This means that taxpayers whose income doesn’t exceed Rs 12 lakh will now pay 'zero tax'. 

Here’s how this works:

- For incomes up to Rs 12 lakh, the rebate under Section 87A ensures that taxpayers pay no tax. 
- For salaried individuals who avail of the standard deduction benefit of Rs 75,000, the tax-free limit is Rs 12.75 lakh, further increasing the benefit.

This effectively means that if your taxable income is Rs 12 lakh or less, you won’t owe any taxes, thanks to both the tax rebate and the revised tax slabs.

Does that mean you only pay tax on the amount above Rs 12 lakh:

Not quite. The tax rebate is only available for those whose income is up to Rs 12 lakh. If your income exceeds Rs 12 lakh, you will have to pay taxes according to the new slab rates on the amount exceeding Rs 12 lakh.

For example:
- If your income is Rs 12.1 lakh, your taxable income of Rs 12.1 lakh will be taxed in the following way:
  - Rs 4 lakh to Rs 8 lakh (5% tax) = Rs 20,000
  - Rs 8 lakh to Rs 12 lakh (10% tax) = Rs 40,000
  - The remaining Rs 0.1 lakh (10% tax) = Rs 1,000
  
Total tax = Rs 61,500 for an income of Rs 12.1 lakh.

- For someone earning Rs 15 lakh, the tax would be calculated as follows:
  - Rs 4 lakh to Rs 8 lakh (5% tax) = Rs 20,000
  - Rs 8 lakh to Rs 12 lakh (10% tax) = Rs 40,000
  - Rs 12 lakh to Rs 15 lakh (15% tax) = Rs 45,000
  
Total tax = Rs 1,05,000 for an income of Rs 15 lakh.

Tax benefit for higher earners

For those earning above Rs 15 lakh, the revised tax rates provide substantial savings:
- Income between Rs 12 lakh to Rs 16 lakh will now be taxed at 15% (a sharp cut from the previous 30%).
- Income between Rs 16 lakh to Rs 20 lakh will be taxed at 20%.
- Income between Rs 20 lakh to Rs 24 lakh will be taxed at 25%.
- Income above Rs 24 lakh will continue to be taxed at 30%.

For example, someone earning Rs 18 lakh will pay:
- Rs 4 lakh to Rs 8 lakh (5% tax) = Rs 20,000
- Rs 8 lakh to Rs 12 lakh (10% tax) = Rs 40,000
- Rs 12 lakh to Rs 16 lakh (15% tax) = Rs 60,000
- Rs 16 lakh to Rs 18 lakh (20% tax) = Rs 40,000
  
Total tax = Rs 1,60,000 for an income of Rs 18 lakh.