Budget 2025: No income tax payable up to income of 12 lakh -- relief for middle class

Tax-Budget 2025 LIVE: FM Nirmala Sitharaman said there will be no income tax payable up to income of 12 lakh -- giving a big relief to the middle class taxpayers.

The new tax slabs under the New Tax Regime are:

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Tax slabs Tax rate 

0-4 lakh - NIL or zero
4-8 lakh - 5%
8-12 lakh -10%
12-16 lakh - 15%
16-20 lakh - 20%
20-25 lakh: 25%
Above 25 lakh- 30%

"The middle class provide strengths to the economy. In recognition of their contribution, we have periodically reduced the tax burdens. I am now happy to announce that there will be no income tax up to an income of Rs 12 lakhs," said Finance Minister Nirmala Sitharaman.

Taxation continues to be a prominent topic of discussion leading up to the budget announcement, with a particular focus on the challenges faced by middle class taxpayers. Many are wondering if the government will make changes to the current 30% tax slab.

There was speculation that the finance minister may adjust tax slabs and rates in the upcoming budget, with a potential focus on providing relief for salaried taxpayers earning between RS 15-20 lakhs. 

BankBazaar CEO Adhil Shetty earlier had proposed key tax reforms, such as raising the highest tax slab to Rs 18 lakh and implementing a 30% flat deduction on gross income.

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The income tax slab of 30% has remained at Rs 15 lakh since 2020. However, the Cost Inflation Index (CII) has increased by 21% during this period. In response to this, Shetty suggests increasing the threshold to Rs 18 lakh to align with inflation. This proposed change aims to alleviate financial pressure on urban salaried individuals experiencing rising costs and to ensure that higher-income earners are not unfairly burdened by taxes, based on Shetty's argument.

Shetty said: "The 30% slab is stuck at the Rs 15 lakh level since the start. If we update it by 20%, it needs to be at Rs 18 lakh. Without this update, taxpayers with higher income get burdened with a disproportionately higher share of the taxes.”

Shetty explained: "Let's assume the new regime slabs were adjusted in the following manner that allowed the 30% slab to start above Rs 18 lakh. It would free up monthly savings starting from Rs 1300 on a taxable income of Rs 8 lakh and going up to Rs 7800 on incomes of Rs 18 lakh and upwards. For instance, on an income of Rs 19 lakh, your tax savings would improve to Rs 93,600 or Rs 7800 per month."

A primary argument in favour of eliminating or reducing the 30% income tax bracket is to boost disposable income for taxpayers. This increase in disposable income has the potential to fuel higher consumption levels, which are essential for fostering economic growth. Given that private consumption accounts for nearly 60% of India's GDP, any policy that puts more money in the hands of consumers could spur demand and drive economic activity.

However, it is important to consider that the 30% tax bracket plays a significant role in contributing to the government's tax revenue. Removing or reducing this tax bracket could result in a substantial revenue shortfall, which could pose challenges for the government, particularly as it looks to increase spending on critical areas such as infrastructure, healthcare, and social welfare programs.