Income Tax Rule: The most notable aspect of last year’s Budget 2025 was the announcement of “No income tax up to Rs 12 lakh.” This provided considerable relief to countless middle-class taxpayers. However, the intricacies of the legislation behind this announcement reveal a different narrative.
In reality, income exceeding Rs 4 lakh is subject to tax according to the applicable slab, but the rebate under Section 87A effectively brings it down to zero. This indicates that the “zero tax” is a result of the exemption rather than the slab itself. This subtle distinction becomes crucial when your income slightly surpasses Rs 12 lakh. This is where the entire calculation of marginal relief starts.
Headline vs. Law: Understanding the Source of ‘Zero Tax’
The tax slabs for the new regime for the financial year 2025-26 are as follows:
Zero on Rs 0–4 lakh
5% on Rs 4–8 lakh
10% on Rs 8–12 lakh
15% on Rs 12–16 lakh
20% on Rs 16–20 lakh
25% on Rs 20-24 lakh
30% on Rs 24 lakh and above
This indicates that every rupee earned over Rs 4 lakh is taxable. For an income of Rs 12 lakh, the direct slab tax amounts to Rs 60,000 ( Rs 20,000 + Rs 40,000). Subsequently, the Rs 60,000 rebate under Section 87A nullifies this entire tax, resulting in no tax liability for the taxpayer. The clear implication is that the exemption is not due to the absence of tax on the income, but rather because the tax is imposed and then subsequently waived.
Understanding the Difference between Rebate and Slab
The Budget 2025 raised the rebate threshold from Rs 7 lakh to Rs 12 lakh and increased the rebate amount from Rs 25,000 to Rs 60,000. This rebate is exclusively available to resident individuals, excluding Hindu Undivided Families (HUFs), partnerships, or corporations.
As this is a rebate rather than a slab structure, it has a fixed maximum limit of Rs 60,000 or the tax owed, whichever is lower. If the income is capped at Rs 1.2 million, the tax remains at Rs 60,000 and is entirely waived. However, once the income exceeds this threshold, the fundamental premise of the rebate is compromised.
Rs 13.45 lakh – Rs 12.75 lakh=Rs 70,000. If this amount exceeds your taxable income, the slab tax rule will apply. As mentioned above, under the applicable tax slab, income up to Rs 12 lakh is taxed at Rs 60.
The additional Rs 70 would be taxed at 15%, amounting to Rs 10,500. The total tax would be Rs 60,000 + Rs 10,500=Rs 70,500. However, under the marginal relief rule, if the income is only Rs 70,000 above Rs 12 lakh, the tax would be paid only on that amount, resulting in a saving of Rs 500.
The government has introduced a provision in the new tax system allowing a standard deduction of ₹75,000 from your total income. This means that regardless of your income level, the Income Tax Department will calculate your taxable income after deducting Rs 75,000. Consequently, income up to Rs 12 lakh is exempt from tax, and with the standard deduction of Rs 75,000, a total income of up to Rs 12.75 lakh remains tax-free.
Relief for income exceeding Rs 12.75 lakh
If, after applying the standard deduction of Rs 75,000, your income surpasses Rs 12 lakh, reaching Rs 12.10 lakh, you will lose the entire rebate since it is only applicable up to ₹12 lakh. Tax will then be calculated according to the applicable slab rates.
You will incur Rs 20,000 on income between Rs 4 lakh and Rs 8 lakh at a rate of 5%,
Rs 40,000 on income between Rs 8 lakh and Rs 12 lakh at a rate of 10%,
and Rs 1,500 at 15% on the Rs 10,000 that falls between Rs 12 lakh and Rs 12.10 lakh.
This results in a total tax of Rs 61,500.
Thus, an additional Rs 10,000 in taxable income leads to a tax of Rs 61,500. Those earning Rs 12 lakh pay no tax, while those earning Rs 12.10 lakh face a tax bill of Rs 61,500. This significant difference poses a challenge for taxpayers.
Marginal relief beyond the standard deduction
Marginal relief is a provision designed to mitigate this issue. According to this rule, the extra tax owed on income exceeding Rs 12 lakh cannot be more than the additional income itself. For instance, if your income is Rs 12 lakh and you earn an extra Rs 10,000, the tax will only be applied to that Rs 10,000, not the full Rs 61,500.
This relief gradually diminishes and ceases at an income level of around Rs 12.75 lakh. The total tax for an income of Rs 12.75 lakh amounts to Rs 71,250, which is lower than the Rs 75,000 that exceeds Rs 12 lakh. Therefore, the complete slab tax will apply to any income above Rs 12.75 lakh.