Summary: In Budget 2025, the Finance Minister announced a significant change: individuals earning up to Rs 12 lakh annually will pay no income tax. Contrary to raising the basic exemption limit, this move hinges on the rebate provided by Section 87A of the Income Tax Act. This rebate now extends to incomes up to Rs 12 lakh, sparing eligible taxpayers from paying any tax on their earnings. However, special rate incomes like short-term capital gains do not qualify for this rebate, maintaining their tax liability even below the Rs 12 lakh threshold. The new regime also introduces marginal relief for those marginally exceeding Rs 12 lakh, ensuring their tax does not disproportionately increase. This comprehensive guide includes detailed illustrations and frequently asked questions to clarify the implications of these changes for taxpayers in FY 2025-26.
1. The announcement by the Hon’ble Finance Minister in Budget 2025 that “an individuals earning up to Rs 12 lakh will pay NIL tax from now on” is the most discussed topic amongst taxpayers. Let us try to solve the puzzle of NIL Tax on 12 Lakhs income with the help of illustrations and FAQ.
Q. How come there will be NIL tax on income up to Rs 12 lakhs when the basic limit of exemption as per Slab is only Rs. 4 Lakhs ?
Ans . NIL tax payable on income up to Rs 12 lakh does not indicate an increase in the basic exemption limit to Rs 12 lakh. This is due to the provision of a rebate under Section 87A of the Income Tax Act.
Q. What is the rebate under Section 87A and who is eligible for this rebate?
Ans. The rebate under section 87A is available in the form of a deduction from the tax liability. It is available to individual taxpayers whose income does not exceed the specified threshold. The rebate under Section 87A is now applicable up to a total income of Rs 12 lakh in accordance with the proposed Finance Bill 2025.
Only resident individuals are eligible for the rebate under section 87A. Non-resident taxpayers and other types of tax payers i.e Hindu Undivided Families (HUF), firms, etc., are not eligible for this benefit.
Illustration : Ms. Shobha is a retired Banker . Her income from pension is Rs. 7,75,000. Income from Interest & dividend is Rs. 3,50,000 and 1,50,000, respectively. Tax Liability for FY 2025-26 will be NIL. The net tax liability is computed as follows:-
| Sl | Particulars | Rate | Amount (Rs.) | Amount (Rs.) |
| (a) | Net Income from Pension (after std deduction) | 7,00,000 | ||
| (b) | Income from Interest and Dividends | 5,00,000 | ||
| Taxable Income (a+b) | 12,00,000 | |||
| Tax on income chargeable at normal rate : | ||||
| (c) | Upto 4,00,000 | NIL | ||
| (d) | Rs 4,00,000,-8,00,000 | 5% | 20,000 | |
| (e) | Rs. 8,00,000 – 12,00,000 | 10% | 40,000 | |
| Total Tax chargeable from normal Income (c+d+e)) | 60,000 | |||
| (f) | Rebate under Section 87A | 60,000 | ||
| (g) | Tax from Normal Income (e-f) | NIL |
2. Income taxable at a special rate will not receive the benefit of the Rebate under section 87A. Special rate income includes short-term capital gain under section 111A and long-term capital gain.
2.1 Section 111A deals with the taxation of STCG from the sale of listed equity shares, mutual funds that invest in equity shares and units of business trusts.
2.2 It means an individual having income from capital gains etc. will not be benefited with NIL tax even if his income is below Rs. 12 Lakhs
Illustration: Mr. Amit is a salaried employee . In FY 2025-26 , his income from salary is Rs. 9,00,000 and the short-term capital gain from the sale of equity shares is 3,00,000. Tax Liability will be computed as follows :
| Sl. | Particulars | Rate | Amount (Rs.) | Amount (Rs.) |
| (a) | Income from Salary | 9,00,000 | ||
| (b) | Less : Standard Deduction | 75,000 | ||
| (c) | Taxable Salary (a-b) | 8,25,000 | ||
| Tax on income chargeable at normal rate : | ||||
| (d) | Upto 4,00,000 | NIL | ||
| (e) | Rs 4,00,000,- 8,00,000 | 5% | 20,000 | |
| (f) | Rs. 8,00,000 – 8,25,000 | 10% | 2,500 | |
| (g) | Total Tax chargeable from normal Income (d+e+f+g) | 22,500 | ||
| (h) | Rebate under Section 87A | 22,500 | ||
| (i) | Tax from Normal Income (g-h) | 0.00 | ||
| (j) | Income chargeable at special rate (STCG) | 3,00,000 | ||
| (k) | Tax @ 20% on STCG (Income Chargeable at special rate )
|
60000 |
3. Mr. Amit will not get the rebate on special income. Only the salary portion would be eligible for the rebate under section 87A.
3.1 However , there is a difference of opinion among the experts about the net taxable income for Rebate . According to some experts ,net taxable income, including special rate income, should be lower than Rs 12 lakh for rebate under section 87A. Thus, no rebate will be allowed if income including STCG is above Rs 12 lakh,
3.2 A clarification is awaited from the government to put an end to the ambiguity and difference in opinion.
4. Budget 2025 has eliminated the issue around special rate incomes’ rebate eligibility. Therefore, even if a taxpayer’s income constitutes only capital gains and it does not exceed Rs 12 lakh, the taxpayer will not be entitled to the Section 87A rebate.
Illustration: Ms. Sandhya’s total income for FY 2025-26 includes LTCG of Rs 4,00,000 and STCG of Rs. 5,00,000 under Section 111A. Her Tax Liability will be computed as follows :
| Sl. | Particulars | Rate | Amount(Rs.) | Amount(Rs.) |
| (a) | Long-Term Capital Gain | 4,00,000 | ||
| (b) | Tax on LTCG ( 4,00,000- 1,25,000)* 12.5% | 12.5% | 34375 | |
| (c) | Short-Term Capital Gain | 5,00,000 | ||
| (d) | Tax on Short-Term Capital Gain 20% on 5,00,000 | 20% | 1,00,000 | |
| (e) | Total Tax (b+d) | 1,34,375 |
Q. There can be individuals whose net taxable income exceeds Rs 12 lakh just by a small margin after claiming the maximum eligible deductions. How will their tax liability be computed ?
Ans. An individual can claim marginal tax relief if their taxable income is more than Rs 12 lakh.
Q. What is the marginal relief and how it is calculated ?
Ans. Marginal reliefs designed to provide relief to the taxpayers when income marginally exceeds the specified threshold. Marginal relief is available in such a manner that the net tax income tax shall not exceed the amount of income exceeding Rs 12 lakh. The marginal relief can be claimed even after a taxpayer claims all the relevant deductions available under the new tax regime.
Illustration: Mr. Anil is a salaried individual with a gross taxable income of Rs 14 lakh. His employer contributes Rs.1,00,000 in NPS under section 80CCD(2). Tax Liability will be computed as follows :
| Sl. | Particulars | Rate | Amount(Rs.) | Amount(Rs.) |
| (a) | Income from Salary | 14,00,000 | ||
| (b) | Less : Standard Deduction | 75,000 | ||
| (c ) | Deduction under section 80CCD(2) | 1,00,000 | ||
| (d) | Taxable Salary (a-(b+c) Tax on income chargable at normal rate : | 12,25,000 |
|
|
| (e) | Up to 4,000,000 | NIL | ||
| (f) | Rs 4,00,000,- 8,00,000 | 5% | 20,000 | |
| (g) | Rs. 8,00,000 – 12,00,000 | 10% | 40,000 | |
| (h) | 12,00,000 – 12,25,000 | 15% | 3,750 | |
| (i) | Total Tax chargable from normal Income (e+f+g+h) | 63,750 | ||
| (j) | Marginal Relief | 38,750 | ||
| (k) | Net Tax Liability ( excluding surcharge) | 25,000 |
5. Mr. Anil is eligible to claim a standard deduction of Rs 75,000 from his salary under the new tax regime. Further, he is eligible to claim a deduction under Section 80CCD (2) for the NPS contribution by an employer for Rs 1 lakh. After claiming a total deduction of Rs 1.75 lakh, his net taxable income is Rs 12,25,000. As the income is more than Rs 12 Lakhs , Mr. Anil will not be eligible for a tax rebate under Section 87A. He has to pay tax on income of Rs 12,25,000. The total tax liability on Rs. 12,25,000/- will be Rs 63,750 (excluding cess). However , he is eligible for marginal relief.
Q. How is the amount of marginal relief calculated in the above Illustration ?
Ans :Marginal relief is available in such a manner that the net amount payable as income tax shall not exceed the total amount income exceeding Rs 12 lakh. Thus, his income of Rs 12,25,000 exceeds by Rs 25,000 over the threshold limit of 12 Lakhs. The net amount payable as Income Tax will be Rs 25000 and Rs. 38750 ( 63750–25000 i.e tax liability less net amount payable ) will be marginal relief.
6. Marginal relief on the tax payable is available only to a certain income level. Post that, an individual will be required to pay full tax on their income as calculated by the new income tax slabs under the new tax regime.
6.1 Taxpayers can claim marginal relief up to a total income of Rs 12,70,587 (i.e., Rs 12,70,588 being the break-even point where total tax liability as per slab equates with the income exceeding Rs 12 Lakhs
6.2 Marginal relief is available to the resident individuals only. Taxpayers other than resident individuals, such as non-residents and HUFs, are not eligible for the marginal relief benefit.”
7. The new tax regime has a higher basic exemption and standard deduction, wider slabs and lower rates. Tax exemptions and deductions are restricted in the new tax regime.
7.1 In the New Regime, deductions are available for (a) Standard deduction of Rs. 75000/- to salary employees and pensioners (b) Contributions made by an employer toward the National Pension System (NPS) (c) Conveyance Allowance to the employees who do not have employer-provided transportation for work-related trips and (d) allowance for Disabled Employees
8. Conclusion: It can be concluded that the nil tax on income up to Rs 12 Lakhs is by virtue of the rebate under section 87. The basilic exemption limit is Rs 4,00,000 only. Taxpayers with incomes up to Rs 12 lakh under the new regime would not have to pay any tax owing to the rebate to offset the applicable tax calculated as per the applicable slabs.
Disclaimer : The article is for educational purposes only.
The author can be approached at caanitabhadra@ gmail.com
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