Personal taxes @2025 : Decoding the nitigrities of zero tax till RS 12 Lakh

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INTRODUCTION

On February 1, 2025, Smt. Nirmala Sitharaman unveiled the AY 2025-26 Budget, introducing key changes to income tax slabs and exemptions. While these exemptions reduce tax burdens and promote equity, they can also strain government revenues, leading to higher taxes elsewhere or spending cuts.

This article critically examines these exemptions—their benefits, drawbacks, and impact across income groups—while exploring potential reforms for a fairer, more efficient tax system.



MARGINAL TAX RELIEF

From April 1 2025 individuals with taxable incomes up to ₹12 lakh will be exempt from paying tax. However, those slightly exceeding this limit after deductions can claim marginal tax relief under Section 87A of the new tax regime.

Marginal relief is designed to prevent taxpayers from paying disproportionately high taxes due to a minor income increase. It applies up to a total income of ₹12.75 lakh beyond this full tax liability applies as per new slabs.

If the net taxable income exceeds this level, then the individual will not be eligible for marginal relief. Post that, an individual will be required to pay full tax on their income as calculated by the new income tax slabs under the new tax regime.



source:https://upstox.com/news/personal-finance/tax/marginal-income-tax-relief-calculation-2025-26-know-tax-on-12-1-lakh-12-5-lakh-12-7-lakh-income/article-143884/

IMPACT ON LOW AND MIDDLE INCOME INDIVIDUALS

In the new income tax regime, the basic exemption limit has been increased to ₹4 lakh from ₹2.5 lakh. The limit for not paying income tax was raised from ₹7 lakh to ₹12 lakh, which means that approximately one crore assessees who previously had to pay taxes ranging from ₹20,000 to ₹80,000 will now pay no tax. The ₹50,000 available under the old regime would be replaced by a new standard deduction of ₹75,000. Now, if a salaried person's income before standard deduction is less than or equal to ₹12,75,000, they won't have to pay any taxes.

More than eight crore people have filed their ITRs for the year  2024-25; 74% of them chose the new tax regime, who will benefit from the new slab rates . An estimated amount of more than ₹1 lakh crore of disposable income will be in the hands of the taxpayers as a result of this new tax system.

People with more disposable income will save more money and be able to invest more in real estate, equities, and mutual funds. Tax relief increases consumer spending, driving economic growth by boosting demand for goods and services.

 

IMPACT ON HIGH INCOME INDIVIDUALS

High income individuals will benefit from structural changes in tax slabs and surcharge rate. One of the key changes is the increase in the threshold for the highest tax rate of 30%, previously individuals earning an amount of more than ₹15 lakh annually were subjected to this maximum rate. However, with the revision in the tax system, the 30% tax rate will now apply only to the individual earning ₹24 lakh per year. This shift will provide substantial relief to the high income individuals as it allows a larger portion of their income to be taxed at a lower rate.

Another important benefit comes from the reduction in the surcharge rate on income above ₹5 crore. Under the previous text structure, the surcharge rate was 37%, resulting in an effective tax rate of 42.74% for ultra-high net-worth individuals; now the surcharge has been reduced to 25%, bringing down the highest effective tax rate to 39%. This reduction will overall reduce the tax liability and make the new tax regime more attractive for high net-worth individuals as compared to the old system.

These changes reflect the government’s intentions to simplify the taxation and make the new regime more appealing, especially for those earning higher income(as these people may have previously preferred the old system due to the more number of deductions and exemptions available). By lowering the tax burden on high net-worth individuals, the government aims to encourage more participation in the new regime and simultaneously boost investments and spending by affluent taxpayers.

 

KEY TAX REFORMS AND THEIR IMPLICATIONS

 

Tax Collected at Source(TCS) and Tax Deducted at Source(TDS)

In a bid to rationalise tax collection and ease compliance, the budget has proposed an increase in the limits for TDS and TCS, which is likely to benefit a wide swathe of the population.

While senior citizens and landlords are the main beneficiaries of the hike in the TDS limit, travellers and parents sending their children abroad for higher education will gain from the rise in the TCS threshold. Senior citizens will be exempted from TDS for interest income up to Rs.1 lakh in a financial year; it is currently Rs.50,000. This is expected to provide a big relief to seniors and improve their cash flow amid lower interest rates on deposits.

Depending on the individual tax slab, senior citizens can enjoy a relief of up to Rs.15,000 after this TDS limit enhancement. Lesser tax burden will leave more cash in the hands of senior citizens. The TDS limit increase for senior citizens will facilitate deposit mobilisation and support banks’ credit to deposit ratio.

The budget also raised the threshold for exemption from TDS on rental income from Rs.2.4 lakh a year to Rs.6 lakh, which will benefit people deriving a sizable income from renting out property, particularly in metros.

The simplified TDS on rent decreases the compliance burden for tenants (they don’t have to deduct tax on rent up to Rs.50,000 a month) and enhances liquidity for landlords. This will positively impact the rental housing market, especially in metro cities.

 

The TCS thresholds have also been altered under the Liberalised Remittance Scheme, benefitting those conducting cross-border transactions. Earlier, tax was collected for all remittances above Rs.7 lakh. This limit has now been raised to Rs.10 lakh. For education that is being financed through a loan from specified financial institutions, TCS has been completely removed. Earlier, 0.5% of the amount was charged for education loans above Rs.7 lakh, while for self-financed education transactions, 5% was charged for amounts exceeding Rs.7 lakh. The removal of TCS on education loans further lightens the financial load on students and their families, easing access to educational financing.

National Pension Scheme (NPS) and tax benefits:


●      The National Pension Scheme (NPS) remains a valuable tax-saving tool, especially for salaried individuals with employer contributions. Under Section 80CCD(2), the tax deduction limit has increased to 14%, up from 10%. For example, a salaried individual earning ₹13,70,000, with ₹6,85,000 as basic pay, can now benefit from a ₹95,900 contribution to NPS. After applying the standard deduction of ₹75,000, the taxable income drops to ₹11,99,100, ensuring no tax is payable due to NPS contributions.

●      NPS Vatsalya scheme offers an additional tax benefit of ₹50,000 exempted over and above the ₹1,50,000 limit under the section 80 C. This incentive will make long-term pension planning more beneficial.

Relief for homeowners:

The new income tax regime will offer a significant relief for homeowners, by allowing them to declare the annual value of two self-occupied properties as nil, which means that they will now not have to pay any taxes on the deemed rental income from these two properties. By introducing this provision, it will be easier for individuals to own and maintain multiple residential properties without having a burden of additional tax, significantly promoting the housing investments and financial stability for homeowners.

Long Term Capital Gain( LTCG)

There are significant changes in the taxation of capital assets, including tax free bonds, unlisted shares, real estate, alternative investment funds, and mutual funds. These assets will now be taxed based on their classification as long term or short term.

 

       1. Unit linked insurance plans( ULIPs) taxation:

●       If the annual premium exceeds ₹2.5 lakh such gains will be taxed at LTCG, aligning ULIPs with equity investments.

●      Who will lose? High-net-worth individuals(HNWIs) and investors using ULIP as a tax investment vehicle will pay more tax on their return as previously ULIPs maturity proceeds were exempt under section 10(10 D).

2. LTCG for various assets:

●      Foreign Portfolio investors, shares, equity, mutual funds, and business trust: Taxed at 12.5%.

●      Government securities and bonds: Taxed at 10%.

●      Who will lose?Equity, mutual fund investors and FPIs will pay higher LTCG tax which will reduce their overall investment gains.

3. Taxation of alternative investment funds(AIFs)

●      Category 1 and 2 AIFs, previously enjoyed pass-through taxation but are now taxed at 12.5% at fund level

●      Category 3 AIFs: continue to be taxed at investor level.

●      Who will lose? HNWIs and institutional investors investing in AIFs will bear a higher tax burden compared to the retail investors, not investing in AIFs.

 

ECONOMIC AND SECTORAL CONSEQUENCES

 

Increase in disposable income and higher consumption:

With ₹1 lakh crore in additional disposable income, consumption will rise, fueling economic growth. Increased financial flexibility may boost investments in real estate, equities, and mutual funds, while traditional tax-saving instruments like PPF and EPF may see reduced interest. The banking sector could experience higher deposits, improving liquidity and lowering borrowing costs for both consumers and businesses.

There is a chance that investors will shift toward ULIPs, REITs and AIFs, While disregarding conventional tax-saving options like PPF,EPF and tax free-bonds.

 

Government revenue and fiscal deficit:

Tax exemptions and reduced surcharges, particularly for high-income individuals, may lower direct tax revenues. To offset this, the government might cut expenditures or boost revenue through higher indirect taxes, like GST. The fiscal deficit for 2025–26 is projected at 4.4% of GDP, down from 4.8% in 2024–25, reflecting stronger revenue growth (11.1%) compared to expenditure growth (7.4%).

 

Potential inflationary pressure:

Raising tax exemptions may lead to more consumer spending, driving demand in sectors like real estate, automobiles, and essentials, potentially causing demand-pull inflation in the economy.

It may also raise demand for essential commodities like fuel housing, which affect the overall cost of living.

 

WAY FORWARD:

The new tax regime offers reforms to simplify taxation and boost disposable income, benefiting middle and high-income individuals. However, it could reduce long-term savings in traditional instruments and increase tax liabilities for capital market investors. A balanced policy is crucial to support economic growth, fiscal sustainability, and sustainable development in the financial and banking sectors.

 

Blog written by Nidhi and Gaurav 

Reference:


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