Budget 2025: ₹12 Lakh Tax-Free? Claim That Sounds Too Good to Be True!

After hearing today’s budget announcement, the middle class must be thrilled with the announcement that there will be no tax up to ₹12 lakh. For years, taxpayers have been demanding a substantial increase in tax slabs, due to rise in inflation and living costs. And finally, in her eighth consecutive budget, Hon’ble FM Nirmala Sitharaman made a grand announcement —“No tax up to ₹12 lakh!”

But wait—is it really that simple? Has the government suddenly decided to exempt middle-class taxpayers from their share of taxes? If so, where is this money coming from? After all, the government isn’t offering this out of their own pockets! So, what’s the catch?

Before diving into the fine print, let’s take a quick look at how tax slabs have evolved over the years:

 Evolution of Basic Exemption Limits

• 2001: ₹1,00,000
• 2005: ₹1,10,000
• 2009: ₹1,60,000
• 2012: ₹2,00,000
• 2014: ₹2,50,000
• 2020: ₹5,00,000 (after rebate)
• 2023:

• Old regime: ₹5,00,000 (after rebate)
• New regime: ₹7,00,000 (after rebate)

• 2025:

• Old regime: ₹5,00,000 (after rebate)
• New regime: ₹12,00,000 (after rebate)

From this, it’s evident that the basic exemption limit under the old regime has remained stagnant at ₹2.5 lakh since 2014! While there have been incremental hikes, they have hardly kept pace with inflation. To compensate for this stagnation, the government has been tweaking slab benefits in 2020, 2023, and now in 2025—but is it truly a benefit, or just a well-packaged illusion?

 New Tax Slabs Under the New Regime (2025-26)

Now, you might be thinking—“But FM Nirmala Sitharaman clearly said ‘No tax up to ₹12 lakh’! Then why does this table show tax rates for income starting from ₹4 lakh?”

Well, both statements are technically correct, but as always, there’s a hidden * (asterisk)—Terms & Conditions Apply!

Why Increase the Rebate Instead of Raising the Slab?

Under Section 139(1), if your income exceeds the basic exemption limit, you are compulsorily required to file an ITR. By keeping the basic exemption limit at ₹4 lakh under the new regime, the government ensures that a majority of people still fall under the tax filing bracket, even though they won’t pay tax (thanks to the rebate). This helps the government maintain high taxpayer numbers for statistical and administrative purposes.

Conditions to Enjoy ‘No Tax up to ₹12 Lakh’

1. Only applicable under the new regime—Old regime taxpayers, tough luck!

2. The rebate (tax discount) will be available only if the total income (including special rate income like LTCG, STCG etc) is ≤ ₹12 lakh.

3. The benefit of rebate is only available to resident individuals. NRIs and HUFs don’t get this benefit.

4. Income taxable at special rates (like LTCG, STCG) is included in total income, but rebate is NOT available on such incomes—which means you’ll still pay tax on LTCG/STCG, even if your total income is below ₹12 lakh!

5. File the Income Tax Return to avail the benefit.

Government’s Master Plan: Phasing Out the Old Regime? 

It’s crystal clear—the government is actively pushing taxpayers toward the new regime, making it more attractive each year. Let’s analyze the pattern:

• 2020: New regime introduced—but very few opted for it.
• 2023:
• New regime made default.
• Slab limits increased, tax rates reduced.
• Surcharge capped at 25% (down from 37%).
• Standard deduction introduced in the new regime.
• 2024:
• Further tweaks in slab rates.
• Higher standard deduction for salaried individuals.
• Increased employer’s NPS contribution deduction.
• 2025:
• “No tax up to ₹12 lakh” marketing gimmick via rebate trick.

Clearly, the government wants to eliminate the old regime over time, and for good reasons—primarily, to curb tax evasion.

• Why is the Old Regime a Problem for the Government?
•  Difficulty in verifying deductions & exemptions in ITR filings.
• Misuse of deductions—especially the provisions of donations are misused by the taxpayers. Recently, the IT department has started the verification drive by sending SMS to the taxpayers who has donated to political parties in past 3 years. https://taxguru.in/income-tax/income-tax-department-verifying-section-80ggc-political-donation-deduction-do.html

Are People Falling for the New Regime? 

Yes, and in huge numbers! Numbers Don’t Lie.

As per Press Release by the Ministry of Finance (Aug 2, 2024):

• 72% taxpayers opted for the new regime in FY 2023-24 ITR filings.
• That’s 5.27 crore taxpayers out of 7.28 crore total filings!

While this seems like a massive shift, let’s not ignore that 28% (over 2 crore taxpayers) still prefer the old regime—which is not a small number by any means!

Which Regime is More Beneficial to you?

Earlier, we had to calculate and compare to determine which regime was better. But after Budget 2025, it’s quite clear:

• New Regime is better for most individuals.
• Old Regime is beneficial only if deductions exceed ₹7.75 lakh (for incomes up to ₹24 lakh).

But before opting for new regime, don’t forget to check the Pros and Cons of switching to the new regime. https://taxguru.in/income-tax/pros-cons-switching-tax-regime.html

How Will the Government Recover the ₹1 Lakh Crore Tax Forgone Due to the Increased Slab Rates?

According to Budget 2025 announcements, the government is expected to forego approximately ₹1 lakh crore in tax revenue due to the increased income tax slab rates under the new regime. But let’s be honest – governments never really “give away” revenue without having a plan to recover it!

So, what’s their brilliant strategy this time?

The government is aware that the individual participation of retail investors has grown significantly in India’s stock market in recent years. As of 2024, India’s stock market capitalization is projected to reach $4.13 trillion, reflecting significant growth. Over the past five years, individual investors and mutual funds have pumped in nearly ₹4.4 trillion ($50.79 billion) into the cash market, substantially increasing household wealth. In 2021, the year on year return in India was reported at 21.5%, proving that a large number of people are making money from their investments.

Therefore, to recover the loss from increased tax slabs, the government has removed the rebate benefit on long-term and short-term capital gains tax (i.e., special rate income). Which means that even if your total income (including capital gains) is below ₹12 lakh, you WILL NOT get the rebate! i.e. You must pay tax on capital gains at special rates, no matter what.

Controversy Around Section 87A—Finally Settled?

Yes. Until last year, there was massive confusion and litigation over whether rebate under Section 87A was available for capital gains under the new tax regime.

• The Income Tax Department (ITD) had disallowed the rebate for capital gains under Section 87A, which led to multiple legal disputes.
• To settle this issue once and for all, the government has now made it clear that:
  ✅ Rebate will NOT be available under the new regime for income taxable at special rates (LTCG, STCG, etc.).
  ✅ Rebate will STILL be available under the old regime for capital gains.

Since this amendment applies from FY 2025-26, the question remains that will rebate still be available under the new regime for capital gains in FY 2024-25?

This remains a gray area, and we can expect further clarifications from the CBDT (Central Board of Direct Taxes) soon. Until then, taxpayers must be cautious while filing returns for FY 2024-25 and consult tax professionals for guidance.

To know more about this issue, you can check my article: https://taxguru.in/income-tax/issue-rebate-section-87a-capital-gain-tax-detailed.html

• Final Analysis

The government’s strategy is clear:

√ Market the ₹12 lakh no-tax claim as a big win for the middle class.

√ Keep the rebate-based trick instead of directly increasing exemption limits.

√ Push more taxpayers into the new regime

√ Over time, silently phase out the old regime and gain better control over tax collections.

√ The government is not giving away tax benefits for free—it has simply shifted the burden to capital gains taxpayers.

So, the next time you hear “No tax up to ₹12 lakh”, just remember the hidden asterisk!

 #Budget2025 #TaxRegime #NewVsOldRegime #NoFreeLunch

In case you have any questions / query, you can email me at sharshil323@gmail.com.