How is the Income up to Rs 12 lacs tax-free?

The Union Budget 2025 has brought huge relief to the middle class. Both the tax slabs and the tax slab rates have been favourably modified. Further, those with annual income up to Rs 12 lacs will not have to pay any taxes. You may end up saving up to Rs 1.1 lacs in taxes.

Still, there are a few questions that must be crossing your mind.

1. Do you get similar relief if you file your returns under the old tax regime?
2. If the taxes begin at 4 lacs of income, how does the income up to Rs 12 lacs become tax-free? How does the rebate under Section 87A work?
3. Will NRIs (non-resident Indians) get the same relief?
4. What if your income exceeds Rs 12 lacs by only a few thousand? Will your tax liability jump sharply?
5. My income comprises both salary and capital gains. Are capital gains also eligible for rebate under Section 87A?

In this post, let’s find answers to these questions.

Union Budget 2025: The Tax Relief

Existing Tax Slabs under the New Tax Regime			Proposed Tax Slabs under the New Tax Regime
Upto Rs 3 lacs	NIL		Upto Rs 4 lacs	NIL
Between 3 lacs and 7 lacs	5%		Between 4 lacs and 8 lacs	5%
Between 7 lacs and 10 lacs	10%		Between 8 lacs and 12 lacs	10%
Between 10 lacs and 12 lacs	15%		Between 12 lacs and 16 lacs	15%
Between 12 lacs and 15 lacs	20%		Between 16 lacs and 20 lacs	20%
Above Rs 15 lacs	30%		Between 20 lacs and 24 lacs	25%
			Above Rs 24 lacs	30%
*Eligibility for tax rebate under Section 87A enhanced from Rs 7 lacs to Rs 12 lacs

1. The new tax slabs are only for the New Tax Regime. The tax slabs for the old tax regime (5%, 10%, 20%, 30%) remain unchanged.
2. Hence, the entire benefit is only for the New Tax regime. You do not have to pay tax until the total taxable income of Rs 12 lacs only if you file your taxes under the New Tax regime. This threshold has been increased from Rs 7 lacs to Rs 12 lacs in this Budget.
3. Under the old tax regime, this threshold is still Rs 5 lacs.
4. If your income is up to Rs 12 lacs, I see little reason why you should be filing your returns under the old tax regime.
5. Further, this Rs 12 lacs threshold is for the total taxable income i.e. after considering deductions under the New Tax regime. Such deductions include standard deduction (75K) and employer contributions to your EPF, NPS, and superannuation accounts.
6. If you are a salaried employee, you will also get a standard deduction of Rs 75,000 under the New Tax regime. Hence, salaried employees with a total income of up to Rs 12.75 lacs will not have to pay any taxes.

Income After Std. Deduction	Existing			After Union Budget 2025			Difference (Savings)
	Income Tax	Tax Rebate	Net Tax Liability	Income Tax	Tax Rebate	Net Tax Liability
300,000	–	–	–	–	–	–	–
400,000	5,000	5,000	–	–	–	–	–
500,000	10,000	10,000	–	5,000	5,000	–	–
700,000	20,000	–	20,000	15,000	15,000	–	20,000
1,000,000	50,000	–	50,000	40,000	40,000	–	50,000
1,200,000	80,000	–	80,000	60,000	60,000	–	80,000
1,400,000	120,000	–	120,000	90,000	–	90,000	30,000
1,500,000	140,000	–	140,000	105,000	–	105,000	35,000
1,800,000	230,000	–	230,000	160,000	–	160,000	70,000
2,000,000	290,000	–	290,000	200,000	–	200,000	90,000
2,400,000	410,000	–	410,000	300,000	–	300,000	110,000
2,500,000	440,000	–	440,000	330,000	–	330,000	110,000
3,000,000	590,000	–	590,000	480,000	–	480,000	110,000
5,000,000	1,190,000	–	1,190,000	1,080,000	–	1,080,000	110,000

When the taxes begin at Rs 4 lacs, how can the income up to Rs 12 lacs be tax-free?

That happens through tax relief (rebate) under Section 87A. So, your tax liability will be calculated as per the tax slabs above, and if the income is up to Rs 12 lacs, then your tax liability will be set off by the amount of taxes to be paid.

Note that rebate is different from refund. In a tax refund, the income tax department refunds the excess tax that you have paid. Tax rebate is part of the tax calculation itself. It is a concession that you get during calculation of tax itself.

Hence, from the next financial year, if your total income is less than Rs 12 lacs, your employer won’t even deduct TDS from your salary.

Note that relief under Section 87A is only available to resident individuals. Relief under Section 87A is not available to NRIs (non-residents). Hence, for NRIs, taxes begin beyond Rs 4 lacs of income.

Even if your income is more than 12 lacs, you will still pay lower taxes because the tax slabs and tax rates have also been tweaked. The highest 30% tax rate will now only be charged for income above Rs 24 lacs (increased from Rs 15 lacs).

Marginal Relief: What if you earn a little over 12 lacs?

What if you earn only slightly more than Rs 12 lacs? Say Rs 12.1 lacs.

We know that the rebate under Section 87A is applicable only if the income is less than or equal to Rs 12 lacs.

Since the total income is more than Rs 12 lacs, there shall be no rebate available.

 This leads to be very frustrating situation.

If you made Rs 12 lacs, you would have paid zero.

However, when you earn just Rs 10K more, you must pay Rs 61.5K in taxes.

Hence, even though your CTC is higher by 10K, your net take-home salary is lower.

Don’t worry.

In such cases, marginal relief kicks in.

The concept of marginal relief is simple. Your income tax liability cannot increase by more than excess income above the threshold. This marginal relief is also provided under Section 87A.

Income After Standard Deduction	Calculated Income Tax (A)	Whether Tax Rebate applicable?	Tax Rebate (B)	Whether Marginal Relief Applicable?	Marginal Relief (C)	Net Tax Liability (A) – (B) – (C)
400,000	–	NA	–	NO	–	–
600,000	10,000	YES	10,000	NO	–	–
800,000	20,000	YES	20,000	NO	–	–
1,000,000	40,000	YES	40,000	NO	–	–
1,200,000	60,000	YES	60,000	NO	–	–
1,210,000	61,500	NO	–	YES	51,500	10,000
1,225,000	63,750	NO	–	YES	38,750	25,000
1,250,000	67,500	NO	–	YES	17,500	50,000
1,260,000	69,000	NO	–	YES	9,000	60,000
1,270,000	70,500	NO	–	YES	500	70,000
1,275,000	71,250	NO	–	NO	–	71,250
1,800,000	160,000	NO	–	NO	–	160,000
2,000,000	200,000	NO	–	NO	–	200,000
2,400,000	300,000	NO	–	NO	–	300,000
5,000,000	1,080,000	NO	–	NO	–	1,080,000

Technically, marginal relief is also a rebate, just different provisions of Section 87A. I have put the two separately for easy understanding.

Let’s consider the case where the total income (after standard deduction) is Rs 12.25 lacs.

Since the income is more than Rs 12 lacs, the tax rebate under Section 87A will not be applicable.

As per the tax slab rates, tax liability shall be R 63,750.

However, to ensure fairness, you will be offered marginal relief.

Your taxable income exceeds Rs 12 lacs by Rs 25K.

Hence, your tax liability cannot be more than Rs 25K.

Marginal relief = Rs 63,750 – Rs 25,000 = Rs 38,750

Your tax liability will be Rs 25K.

In a way, until you hit about 12.7 lacs, all your excess income above Rs 12 lacs will towards taxes.

Rebate under Section 87A is not available for Capital gains

The rebate under Section 87A is NOT available for all kinds of income.

It is available for tax on salary income, interest/rental income etc.

However, such a rebate under Section 87A is NOT available for tax on incomes charged at special rates. The first thing that comes to mind is capital gains.

I copy an excerpt from Budget memo (Union Budget 2025). This was also the case earlier.

Section 111A is applicable for short-term capital gains on equity/equity funds.

Section 112 and 112A are applicable for long-term capital gains.

Short-term and long-term capital gains on sale of stocks/equity funds are charged at special rates. At 20% and 12.5% respectively.

In fact, long-term capital gains on sale of all capital assets (except debt funds) are now charged at 12.5%.

Since the long-term capital gains on all assets and short-term capital gains on equity assets are taxed at a special rate, tax on gains won’t be eligible for rebate under Section 87A.

Please note short-term gains on debt funds are not taxed at special rates. You must pay taxes at your slab rate. Hence, the rebate under Section 87A will be applicable for taxes on such gains.

Type of Capital Gain	Whether taxed at a special rate	Rate of Tax	Eligible for Rebate under Section 87A
Short Term Gains on equity funds	YES	20%	NO
Long Term Gains on equity funds	YES	12.50%	NO
Short Term Gains on debt funds/gold/real estate	NO	Slab rate	YES
Long Term Gains on debt funds/gold/real estate	YES	12.50%	NO
			www.PersonalFinancePlan.in

Illustration 1:

You earn Rs 8 lacs through salary and Rs 3 lacs from LTCG on sale of equity funds.

Your salary income of Rs 8 lacs will enjoy rebate under Section 87A, but the LTCG from equity funds won’t.

Hence, even though your overall income is less than Rs 12 lacs, you will still have to pay tax on Rs 3 lacs of LTCG.  You still have the benefit of Rs 1.25 lacs exempt LTCG for stocks/equity funds. You will have to pay tax at 12.5% on the remaining Rs 1.75 lacs.

Illustration 2:

You earn Rs 8 lacs through salary and Rs 3 lacs from STCG on sale of equity funds.

Your salary income of Rs 8 lacs will enjoy rebate under Section 87A, but the STCG from equity funds won’t.

Hence, even though your overall income is less than Rs 12 lacs, you will still have to pay tax on Rs 3 lacs of STCG on equity funds.  20% of Rs 3 lacs STCG.

Illustration 3:

You earn Rs 8 lacs through salary and Rs 3 lacs from STCG on sale of debt funds.

Total income (including STCG) is Rs 11 lacs.

Both tax on salary income and STCG from sale of debt funds is taxed at slab rate. Hence, tax rebate under Section 87A will be available, and you will not have to pay any taxes.

Source/Additional Links

1. FAQs on Income Tax website
2. Budget Speech by the Finance Minister
3. Budget Memorandum
4. Finance Bill 2025

Disclaimer

I am not a tax expert and there may be gaps in my understanding. You are advised to consult a Chartered Accountant.

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This post is for education purpose alone and is NOT investment advice. This is not a recommendation to invest or NOT invest in any product. The securities, instruments, or indices quoted are for illustration only and are not recommendatory. My views may be biased, and I may choose not to focus on aspects that you consider important. Your financial goals may be different. You may have a different risk profile. You may be in a different life stage than I am in. Hence, you must NOT base your investment decisions based on my writings. There is no one-size-fits-all solution in investments. What may be a good investment for certain investors may NOT be good for others. And vice versa. Therefore, read and understand the product terms and conditions and consider your risk profile, requirements, and suitability before investing in any investment product or following an investment approach.