BY CHANIKA GOEL
ASSISTANT PROFESSOR
The latest budget announcement on February 1, 2025, declared that anyone opting to be taxed under the new tax regime and making up to Rs 12 lakh annually would not be required to pay any taxes. But at the same time the recently updated tax payment structure is as follows-
So how shall the person making 12 lakhs be paying no tax?
Here’s the answer,
In the budget it is mentioned that income upto 12 lakhs would be tax free not tax exempt which means the person would be liable to computation of taxes as per new tax slabs but after calculation of his tax liability he would be provided with an enhanced tax rebate under Section 87 A which is Rs. 60,000 for an income upper limit to Rs. 12,00,000. A salaried employee could further claim the standard deduction of Rs. 75,000 enhancing his total income limit to 12,75,000. In comparison to the previous budget the rebate has been increased by Rs. 35,000, that is an increase of 140%. Even the income limit to avail this rebate advantage is raised to 12 lakhs from previously 7 lakhs only.
Section 87A rebate is available to only few income types which covers salary, income from rented property and interest income. Any other form of income does not qualify for this benefit.
The following special rate revenues are not eligible for the refund under Section 87A:
The assessment of Section 87 A is very different under both regimes. Incomes subject to special rates of taxation are no longer eligible for the rebate under the updated tax scheme, although they are still under the older one.
Because your eligibility for the Section 87A rebate will be influenced by the type of income you earn and the tax regime you choose, it is imperative that you take these considerations into account when calculating your taxes. Before presuming they are below the rebate limit, investors who depend on capital gains for income should consider their tax liability. Future tax returns must adhere to the clarified interpretation of Financial Budget 2025, that if previous available rebates may still be claimed or not.
Let’s consider the following example to understand things better-
Explanation-
- The total income for Person A and Person B is same but the tax liability is different it is because of special tax rate income in Person B which is taxed at 15% irrespective of the fact that total income of the assessee is less than the threshold limit of Rs. 12 lakhs under Section 87A rebate.
- The total income for Person C is Rs. 12,75,010 that is just ten rupees more than Person A still the tax liability is Rs. 62,402. This is because the Rs. 12 lakh income is tax free and not tax exempt. Tax exempt income under the new tax regime is up to Rs. 4 lakhs only. The rebate of 60,000 under Section 87A makes the income of up to Rs.12 lakh tax free, although the assessor needs to file the tax return if he has more than 4 lakh of income.
So, a detailed and clear analysis of the Budget announcement must have clarity of tax liability and one can accordingly plan their tax structure on the basis of the nature of their income. At management schools like JIMS Kalkaji we teach the students of PGDM and undergraduate courses to thoroughly analyse the budget and its implication on our daily lives, preparing them for the real world.
