Union Budget 2025: No Income Tax Up to ₹12 Lakh – Complete Guide to New Tax Slabs and Rebates

In a landmark move that puts more money in the hands of the middle class, Finance Minister Nirmala Sitharaman announced sweeping changes to the income tax structure in the Union Budget 2025-26. The headline announcement: zero income tax for individuals earning up to ₹12 lakh under the new tax regime, extending to ₹12.75 lakh for salaried taxpayers when accounting for the standard deduction.

This represents one of the most significant tax relief measures in recent years, with the government reaffirming its commitment to the philosophy of "trust first, scrutinize later." The new structure is designed to boost household consumption, savings, and investment while simplifying compliance for millions of taxpayers.

The Big Announcement: Zero Tax Up to ₹12 Lakh

Presenting the budget in Parliament on February 1, 2026, Smt. Sitharaman stated: "There will be no income tax payable up to income of Rs. 12 lakh (i.e., average income of Rs. 1 lakh per month other than special rate income such as capital gains) under the new regime."

For salaried individuals, this limit effectively becomes ₹12.75 lakh due to the standard deduction of ₹75,000. This means a significant portion of India's workforce will now pay no income tax whatsoever, leaving them with substantially more disposable income.

The Finance Minister emphasized: "The new structure will substantially reduce the taxes of the middle class and leave more money in their hands, boosting household consumption, savings and investment."

New Tax Slabs for FY 2025-26 (AY 2026-27)

The Union Budget 2025 introduces a completely revised tax slab structure under the new regime. Here's the breakdown:

Income Range (₹)	Tax Rate
0 – 4,00,000	Nil
4,00,001 – 8,00,000	5%
8,00,001 – 12,00,000	10%
12,00,001 – 16,00,000	15%
16,00,001 – 20,00,000	20%
20,00,001 – 24,00,000	25%
Above 24,00,000	30%

Key Changes Explained

1. Increased Basic Exemption Limit

The basic exemption limit has been raised from ₹3 lakh to ₹4 lakh under the new tax regime. This means individuals earning up to ₹4 lakh pay no tax, and the rebate ensures those earning up to ₹12 lakh also pay zero tax.

2. Enhanced Rebate Under Section 87A

The tax rebate under Section 87A has been increased to ₹60,000, up from the previous ₹25,000. This rebate applies to residents with net taxable income up to ₹12 lakh, effectively making their tax liability zero. This is a substantial increase from the previous limit of ₹7 lakh.

3. Standard Deduction Continues

Salaried individuals can continue to claim the standard deduction of ₹75,000 from their salary income. Additionally, the employer's contribution of 14% of basic salary to the NPS Tier-I account remains available as a deduction.

4. No Changes to Surcharge

The surcharge rates on income tax liability remain unchanged for FY 2025-26, providing predictability for high-income earners.

Tax Savings Examples

Let's look at how these changes impact taxpayers at different income levels:

Annual Income (₹)	Old Tax Liability (₹)	New Tax Liability (₹)	Savings (₹)
8,00,000	20,800	0	20,800
12,00,000	62,400	0	62,400
15,00,000	1,04,000	30,000	74,000
20,00,000	2,08,000	1,10,000	98,000
25,00,000	3,64,000	2,10,000	1,54,000

Note: Calculations assume the new tax regime. Figures are approximate and exclude cess and surcharge where applicable.

New Income Tax Bill 2025: A Step Towards Simplification

Beyond the immediate tax relief, the Finance Minister announced the New Income Tax Bill 2025, which will replace the Income Tax Act of 1961 from April 2026. The new bill aims to:

• Simplify tax language for easier understanding
• Reduce litigation through clearer provisions
• Enhance tax certainty for taxpayers
• Enable digital-first tax administration
• Align with the spirit of 'Nyaya' (justice)

The government has positioned this as a major taxation reform to realize the vision of Viksit Bharat (Developed India), making the tax system more responsive to citizens' needs.

Old Regime vs. New Regime: Which Should You Choose?

The new tax regime remains the default regime. If you want to avail deductions and exemptions available under the old regime (such as HRA, Section 80C, 80D, home loan interest, etc.), you must actively opt for it.

Quick Decision Guide:

• New Regime is better if: You have minimal deductions or prefer simplicity
• Old Regime may be better if: You claim significant deductions (home loan, 80C investments, health insurance, HRA, etc.) that exceed the benefits of lower tax rates

For most taxpayers earning up to ₹15-18 lakh without substantial deductions, the new regime will likely be more beneficial post these changes.

Impact on the Economy

Finance Ministry estimates suggest that these tax reforms could result in potential tax savings of up to ₹1.14 lakh per annum for many middle-class households. This increased disposable income is expected to:

• Boost consumer spending and demand
• Increase household savings rates
• Stimulate investment in financial instruments
• Improve compliance as the tax burden reduces

What Should You Do Now?

1. Calculate your projected tax liability under both regimes for FY 2025-26
2. Review your investment strategy – with zero tax up to ₹12 lakh, tax-saving investments may need reevaluation
3. Update your tax planning if you're currently in the old regime
4. Stay informed about the New Income Tax Bill 2025 as details emerge
5. Consult a tax professional if your financial situation is complex

Conclusion

The Union Budget 2025-26 delivers on the government's promise of easing the tax burden on the middle class. With no income tax up to ₹12 lakh and a simplified slab structure, millions of Indian taxpayers stand to benefit significantly. The additional announcement of a new Income Tax Bill signals long-term commitment to tax reform and simplification.

As the Finance Minister quoted from Thirukkural: "Just as living beings live expecting rains, Citizens live expecting good governance." These tax reforms represent a step toward responsive governance that understands and addresses citizens' aspirations.