At ₹12 lakh of ordinary taxable income, the arithmetic in the 2025 Budget produced an unusual-looking result. The new slabs generated ₹60,000 of income tax. A rebate then cancelled it. For an eligible resident individual, the final liability on that income was zero. The change was substantial, but it worked through a tax credit rather than a ₹12 lakh zero-rate slab. [1] [2]
Finance Minister Nirmala Sitharaman announced the reform on 1 February 2025. This account concerns income earned in financial year 2025–26, assessed in 2026–27. It is that year’s rules, rather than an unrestricted promise of tax-free earnings, that give the headline its meaning. [1] [2]
How the threshold moved
The government had already raised the new regime’s rebate threshold to ₹7 lakh in the 2023 Budget. At that point, the basic exemption was ₹3 lakh: income above it entered the tax calculation even when a rebate ultimately erased the bill. The 2025 reform extended this approach to a larger band of taxpayers. [3]
Under the revised slabs, the first ₹4 lakh attracted no tax, the next ₹4 lakh attracted 5%, and the following ₹4 lakh attracted 10%. Those two taxable bands generated ₹20,000 and ₹40,000 respectively. The enhanced rebate of up to ₹60,000 removed the resulting liability for residents meeting its conditions. [1] [2]
Salary introduced another step. The standard deduction under the new regime had already risen to ₹75,000 through the 2024 legislation. For someone with ₹12.75 lakh of salary and no other income, subtracting that deduction brought taxable income to ₹12 lakh. The larger salary figure therefore combined two provisions introduced in different budgets; it was not a separate rebate threshold. [4]
Where the headline stops
The Income Tax Department’s guidance limits the enhanced rebate to resident individuals using the new regime. It does not cancel tax charged at special rates, including applicable capital-gains taxes. Someone with investments as well as salary cannot infer the whole tax bill from the salary figure alone. [2]
For ordinary income just above ₹12 lakh, marginal relief softens the sudden return of tax liability. Its purpose is to prevent the income tax before cess from exceeding the amount by which income crosses the threshold, within the relief’s applicable range. The rebate and marginal relief perform different jobs: one removes an eligible bill; the other limits a cliff at the boundary. [2]
The old regime remained unchanged in the 2025 Budget. PRS Legislative Research’s comparison also shows that the new slabs reduced liabilities further up the income distribution. The reform consequently reached beyond the taxpayers whose bills fell to zero. [5]
Relief and the public accounts
Sitharaman presented the change as support for household consumption, savings and investment. That was the policy’s intended economic channel. A smaller liability establishes money retained by an eligible taxpayer; it does not reveal how much was subsequently spent or isolate the reform’s effect on growth. [1]
The budget arithmetic carried a cost. PRS recorded roughly ₹1 lakh crore of projected revenue forgone from the direct-tax proposals as a whole, while income-tax receipts were nevertheless budgeted to rise by 14.4% over the preceding year’s revised estimate. Those figures describe a forecast relative to the government’s assumptions, not an audited loss attributable solely to the rebate. [5]
For a qualifying taxpayer, the change could be read directly in the calculation: tax computed, rebate deducted, liability reduced. What followed in household spending and the public accounts required evidence beyond that calculation.