No tax on income up to Rs 12 lakh, but it's a rebate, not an exemption

Budget 2025 has proposed making normal income up to Rs 12 lakh tax-free under the new tax regime for the fiscal year 2025-26. However, taxpayers need to be aware that this is not an exemption but a rebate.

 

"By virtue of the rebate only taxpayers with incomes up to Rs 12 lakh under the new regime would not have to pay any tax owing to the rebate to offset the applicable tax calculated as per the applicable slabs," said Amit Gupta, Partner at Saraf and Partners.

 

Difference between exemption, deduction and rebate

 

"Whilst the terms exemption, deduction and rebate have distinct meanings attributable to each of them, in common parlance they tend to be used interchangeably even in the context of the Income Tax statute. However, the difference between exemptions, deductions and rebates under the provisions of the Income Tax Act (ITA) is hinged on their treatment whilst ascertaining the income tax outlay," said Gupta.

 

 

He explained that the ITA broadly seeks to tax total income as per applicable rates:

< An income stream that is exempt is not included in the total income and is not taxed at all.

< A deduction reduces taxable income, meaning it is applied before calculating the tax payable.

< A rebate applies after tax is calculated, reducing the final amount payable, much like a discount.

 

Gupta added that this distinction is not always absolute, and there are overlaps within the ITA itself.

 

In Budget 2025, the announcement that no taxes would be payable on income up to Rs 12 lakh may appear to be an exemption. However, it is actually a rebate under Section 87A of the ITA, meaning that the nil tax outlay only applies if the total taxable income, after deductions under the new tax regime, is up to Rs 12 lakh. 

 

What does exemption till Rs 12 lakh actually mean?

 

"Where an individual or HUF earns income up to Rs 12 lakh, the tax payable on such income (other than income chargeable to tax at special rates such as capital gains on listed equity shares, etc.) would be nil after considering the benefit of rebate as per Section 87A," said Mitesh Jain, Partner at Economic Laws Practice.

 

He provided examples to illustrate:

 

For income of Rs 5,50,000

Capital gains on listed equity shares: Rs 50,000  

Total income: Rs 5,50,000  

Tax on normal income: Rs 5,000  

Tax on special income: Rs 6,250  

Rebate under section 87A: Rs 5,000  

Tax liability (excluding cess): Rs 6,250  

 

For income of Rs 8,00,000

Capital gains on listed equity shares: NIL  

Total income: Rs 8,00,000  

Tax on normal income: Rs 20,000  

Tax on special income: NIL  

Rebate under section 87A: Rs 20,000  

Tax liability (excluding cess): NIL  

 

For income of Rs 11,50,000

Capital gains on listed equity shares: Rs 1,50,000  

Total income: Rs 11,50,000  

Tax on normal income: Rs 40,000  

Tax on special income: Rs 18,750  

Rebate under section 87A: Rs 40,000  

Tax liability (excluding cess): Rs 18,750  

 

The rebate means that while no tax is paid on income up to Rs 12 lakh, it does not mean the income itself is exempt from taxation. The calculation still follows existing slabs, with the rebate bringing down the final tax liability to nil.

 

Tax rates under the new regime:  

Rs 0 - Rs 4 lakh: Nil  

Rs 4 - Rs 8 lakh: 5%  

Rs 8 - Rs 12 lakh: 10%  

Rs 12 - Rs 16 lakh: 15%  

Rs 16 - Rs 20 lakh: 20%  

Rs 20 - Rs 24 lakh: 25%  

Above Rs 24 lakh: 30%