Are You Confused About The New Tax Regime? Here's What You Need To Know.

The Union Budget 2025 by Finance Minister Nirmala Sitharman has brought monumental changes to the tax regime, that further left many individuals confused about how the new rules will affect them.

The announcement that income up to ₹12 lakh will be tax-free has been welcomed, but the finer details of the new tax slabs have raised questions.

At the heart of the confusion is the rebate mechanism, which seems to penalise those who just cross the ₹12 lakh threshold. To clarify the situation, Timeline spoke to Jithin AV, Director, Tass & Hamjit (Financial Advisory Service), who explained the implications of the new tax regime.

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“The Union Budget 2025 brings long-awaited relief to the middle class by making income up to ₹12 lakh tax-free (₹12.75 lakhs for salaried taxpayers with a standard deduction),” Jithin said.

“However, those just crossing this limit will face a higher tax burden due to the rebate mechanism, as the basic exemption remains at ₹4 lakh,” he added.

So, how does this work in practice?

Jithin provided an example to illustrate the point. “If someone’s salary is ₹12.75 lakh, they would pay ₹75,000 as standard deduction then it will be ₹12 lakh. If their income is up to ₹12 lakh, they wouldn’t pay any tax. However, once they cross the ₹12 lakh threshold, the tax calculation doesn’t start from ₹12 lakh, but from ₹4 lakh of their total income.”

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To break it down further, let’s consider an individual with an annual income of ₹15 lakh. According to the new tax slabs, they would pay 5% tax on the amount between ₹4 lakh and ₹8 lakh, and 10% tax on the amount between ₹8 lakh and ₹12 lakh. For the remaining ₹3 lakh (₹15 lakh – ₹12 lakh), they would pay 15% tax.

In simple terms, if your annual income is up to ₹12 lakh, you won’t pay any tax. However, if you cross the ₹12 lakh threshold, you’ll pay tax according to the new slabs, starting from ₹4 lakh of your total income. For example, if your annual income is ₹15 lakh, you’ll pay approximately ₹1 lakh in tax annually.

Also, if an individual’s total yearly income including salary and earnings from other areas, exceeds ₹12 lakh, their entire tax deduction will be based on their total annual income. The total income from all the sources will be used to calculate the tax deduction.

Suppose an individual has a salary of ₹10 lakh and earns an additional ₹3 lakh from freelance work, business and investments, their total income would be ₹13 lakh.

In this case, their tax deduction would be calculated based on the total income of ₹13 lakh, not just the salary of ₹10 lakh.