On 1st February 2025, the Indian Finance Minister presented a budget with some hopes for the Indian middle class. Being catastrophe by direct and indirect taxes, the Indian middle class was clearly overburdened. Rising inflation has further created problems for middle and poor-income groups in India.
In such a scenario, the government had to come up with something to ease the woes of the middle class. As soon as the budget was announced, praises on the government soared on social media platforms. As you have heard on social media, the government has announced zero tax for people earning up to 12 lakh.
So, is it true that people earning up to 12 lakh per year do not need to pay income tax anymore? The statement that no income tax up to 12 lakh per year is both true and false. Let’s analyze and inspect the facts regarding this in the following section.
Different Tax Slabs Still Exist
In her budget speech, FM Nirmala Sitaraman said that individuals earning up to 12 lakh will pay NIL tax. The statement has been misinterpreted by most people. The tax slabs still exist, though you can still avoid paying taxes if your annual income is up to 12 lakh.
| Income (Per Annum) | Tax |
| Rs. 0-4 lakh | 0% tax |
| Rs. 4-8 lakh | 5% tax |
| Rs. 8-12 lakh | 10% |
| Rs. 12-16 lakh | 15% |
| Rs. 16-20 lakh | 20% |
| Rs. 20-24 lakh | 25% |
| Above 24 lakh | 30% |
So, tax exemption for people earning up to 12 lakh is a misconception. Ideally, tax exemption is only available for people earning between 0 to 4 lakh per year. However, people earning up to 12 lakh per year can convert their income tax-free through deductions and rebates.
Tax Rebates and Deductions
The tax liability of salaried people before calculating rebates and deductions is discussed in the following section.
| Income (Per Annum) | Tax Liability |
| Rs. 4-8 lakh (5%) | Rs. 20000 |
| Rs. 8-12 lakh (10%) | Rs. 40000 |
Therefore, the total tax liability for people earning up to 12 lakh per annum is Rs. 60000. Now, let’s analyze how standard deduction and rebate can reduce your tax to zero. In her latest budget speech, FM clarified that the 87A rebate has been increased from 25000 to 60000. Moreover, the taxpayers can enjoy an additional tax deduction of Rs. 75000. Therefore, the tax liability will be zero if your annual income is 12.75 lakh.
Tax-Free Is Not Tax Exemption
Tax-free does not signify tax exemption, and this is where most people have got it wrong with the latest Union Budget. Tax exemption is available for only the 0-4 lakh per annum income slab. In other words, you are legally excluded from taxation if you come under this income bracket.
On the other hand, tax-free means your income is not tax-exempt, though your tax liability can come down to zero through deductions and rebates. Understanding this key difference is crucial for every salaried person before he or she files their taxes.
Result of Zero Tax Liability
Reducing the direct tax liability of the citizens has both positive and negative aspects. Some of the positive things that the government is anticipating through this new tax regime are:
- Boost in Expenses: Since people can save more on taxes, they can plan and make higher expenses. This will eventually boost the local economy, especially the consumer or retail economy in the urban areas.
- More Savings: Instead of making more expenses, many people may focus on savings. Investing in share trading and other investment policies will eventually help in boosting the country’s economy.
- Health Scheme Investment: Various health schemes are there from both private and public sectors. People saving on their taxes means they can invest more in health schemes, which secure their families during health emergencies.
While zero tax liability on mid-income groups may boost the consumer economy in a country, there are some drawbacks that also need to be taken into consideration. For example, the biggest drawback is the revenue deficit for the country. The Government of India has been generous in reducing corporate taxes in the last few years. Now, reducing the tax liability on the citizens will push the government to go for the loans.
Since the government has been working on various social security schemes and doles for the low-income group, the country has observed a steady growth in debt in the last few years. In such a scenario, the debt will continue to rise with the reduction of tax liability to the middle-class earners.
About The Author
