Budget 2025-26: no income tax up to 12 lakh rupees under the new regime

The Union Budget is the government's annual statement of revenue and expenditure, presented to Parliament under Article 112 of the Constitution. On 1 February 2025, Finance Minister Nirmala Sitharaman presented the Union Budget for 2025-26, with its headline measure aimed at middle-income taxpayers: a restructuring of personal income tax under the new regime, which had become the default regime for most individual taxpayers.

Under the revised structure, no income tax is payable on annual income up to 12 lakh rupees under the new regime, through a combination of revised slabs and an increased rebate under Section 87A of the Income-tax Act. For salaried taxpayers, the standard deduction of 75,000 rupees takes the effective threshold to 12.75 lakh rupees, provided the income is of the kind covered by the rebate and other conditions are met. Income taxed at special rates, such as certain capital gains, is not covered by the rebate in the same way, and the threshold is therefore not a blanket exemption for every kind of income.

The revised slabs themselves were also restructured. Income up to 4 lakh rupees is taxed at nil, income from 4 to 8 lakh rupees at 5 per cent, from 8 to 12 lakh rupees at 10 per cent, from 12 to 16 lakh rupees at 15 per cent, from 16 to 20 lakh rupees at 20 per cent, from 20 to 24 lakh rupees at 25 per cent, and above 24 lakh rupees at 30 per cent, with the rebate then bringing the liability to zero for eligible taxpayers up to the threshold.

The government presented the change as a way to leave more disposable income with households, boost consumption, and encourage adoption of the new regime, which offers fewer deductions than the old regime but lower rates. Critics noted that the benefit is concentrated among taxpayers in the middle of the income distribution, that it does not directly help people below the tax threshold, and that its effect on consumption would depend on whether households spent the saving or used it to repay debt or save.

For civil studies readers, the Budget is a reminder that a single headline number, 12 lakh rupees, conceals a mechanism. The number is the product of slabs, a rebate, and a standard deduction, each with its own conditions, and understanding the mechanism is necessary to judge who actually benefits and by how much.