Union Budget 2025: Indian taxpayers get significant relief, no tax on income up to Rs. 12 lakh under new regime

In major relief for middle-class households in India, the Union Budget 2025 announced sweeping changes to the income tax structure, significantly reducing tax burdens.

Annual incomes of up to Rs. 12 lakh will effectively be tax free under the new Income Tax regime, owing to a revision in tax slabs and an increase in the rebate limit. The government hopes that the resultant increase in disposable income will encourage Indians to spend more and save more, thereby boosting financial wellbeing, domestic consumption and economic growth.

Here’s a look at the key announcements and proposals made in Budget 2025. These will come into effect only once Finance Bill is passed in Parliament and receives Presidential assent.

• Table of contents

• Headline measure: Reduced taxes
• No tax for income up to Rs. 12 lakh
• What about higher brackets?
• Union Budget 2025: Impact on mutual funds

Headline measure: Reduced taxes

The Union Budget 2025 overhauled the tax slabs for the new regime of the Income Tax Act, 1961.

Here is a look at the proposed tax slabs for Financial Year 2025-2026.

*Changes are subject to the Finance Bill being passed in Parliament and receiving Presidential assent.

No tax for income up to Rs. 12 lakh

So, how does this translate to zero tax for annual incomes of up to Rs. 12 lakh?

This is made possible because the rebate limit under Section 87A of the Income Tax Act, 1961 has been increased – from Rs. 25,000 to Rs. 60,000 – and the rebate threshold has been raised to Rs. 12 lakh.

Let’s break down the resultant income tax calculation for an individual earning Rs. 12 lakh per annum

• Tax on first 4 lakh = Rs. 0
• Tax on Rs. 4 lakh to Rs 8 lakh (at 5%) = Rs. 20,000
• Tax on Rs. 8 lakh to Rs. 12 lakh (at 10%) = Rs. 40,000
• Total tax payable: Rs. 60,000
• Rebate limit= Rs. 60,000
• Effective tax payable = Rs. 0

Additionally, salaried individuals also receive a standard deduction of Rs. 75,000 on their taxable income (across all income brackets). So, in the case of salaried individuals, annual incomes of up to Rs. 12.75 lakh will be tax-exempt.

However, this rebate will not be applicable on income such as capital gains tax.

Do note that these changes will come into effect April 2025 onwards, if the Budget is passed in Parliament, so they will not be applicable in the upcoming tax season for FY25.

Additionally, these changes are only applicable under the new regime of the Income Tax Act, 1961. The tax slabs and structure under the old regime stay the same.

What about higher brackets?

It is important to note that income up to Rs. 12 lakh is tax-free but not tax-exempt. That means, the tax burden is nullified because of the available rebate, but the income is still taxable as per rules. Hence, individuals earning above Rs. 12 lakh will be eligible to pay the entire applicable tax amount (and not just on the amount exceeding Rs. 12 lakh).

However, the new slabs will also lower the tax burden for individuals earning Rs. 12 lakh to Rs. 24 lakh.

To recap, here’s a comparison of the existing and proposed slabs for individuals earning Rs. 12 lakh and upwards:

Union Budget 2025: Impact on mutual funds

No changes were announced to the capital gains tax structure for equities and mutual funds in the 2025 Budget. However, significant amendments had been made in earlier years, including in the 2023 and 2024 Budgets. Here’s the current capital gains tax structure for mutual funds:

1. Equity-oriented mutual funds (funds investing 65% or more in domestic equities):
   • Short-term capital gains (STCG): If units are held for less than 12 months, the gains are classified as short-term and taxed at 20%.
   • Long-term capital gains (LTCG): If units are held for more than 12 months, the gains are classified as long-term and taxed at 12.5%. However, gains of up to Rs. 1.25 lakh are tax-exempt.
2. Debt-oriented mutual funds (investing <35% in domestic equities)
   • Units purchased after April 1, 2023: Capital gains taxed as per applicable slab rate, regardless of holding period
3. Hybrid mutual funds investing more than 35% but less than 65% in domestic equities
   • Short-term capital gains: If units are held for less than 24 months, gains will be taxed as per applicable slab rate
   • Long-term capital gains: If units are held for more than 24 months, gains will be taxed at 12.5%

Read more: Budget 2024: All you need to know about proposed changes to mutual fund capital gains tax

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