Zero tax till Rs 12 lakh: What's difference between rebate under Section 87A, exemptions & deductions?

Budget 2025: The recent announcement of a Nil tax rate for individuals with taxable income of up to Rs 12 lakh in the fiscal year 2025-26 has been met with enthusiasm by those within this income bracket. Finance Minister Nirmala Sitharaman implemented changes to the slabs, rates, and rebates under the New Tax Regime to guarantee that income up to Rs 12 lakh is exempt from taxes.

Taxpayers need to understand that while a tax rebate will be granted to individuals earning up to Rs 12 lakh under the new tax regime, it is distinct from tax exemptions or deductions.

How much tax do I have to pay? Calculate now

Difference between rebate, exemption and deduction

A tax rebate serves as a form of tax relief specifically aimed at individuals, especially those with lower incomes, to prevent them from being burdened with income tax if their earnings fall below a certain threshold.

As per Section 87A of the Income Tax Act, a tax rebate is provided to individuals earning below a certain threshold to reduce their total tax liability. This rebate is claimed from the overall tax payable and is not subtracted from income. Instead, it reduces the tax payable by a fixed amount.

A partial income tax exemption is granted on specific sources of income, rather than on the overall income amount. This implies that a portion of the income may be exempt from taxes based on its nature. When calculating tax obligations, exempt incomes are the initial components subtracted from one's salary or other sources of income. As per the Budget 2025 announcement, there is a zero tax exemption for incomes up to Rs 4 lakh.

Tax deductions refer to the deductions that a taxpayer can claim to lower their taxable income. These deductions are made on various investments and expenses, ultimately reducing the total tax liability. By subtracting specific expenses from the total income, taxpayers can effectively reduce the amount of tax they owe.

One should note:

An exempt income stream is not factored into the total income and remains untaxed.
A deduction lowers taxable income before the tax payable is calculated.
Rebates are applied after tax calculation, decreasing the final amount owed, akin to a discount.

Rebate, exemptions, deductions in Budget 2025

In Budget 2025, the declaration of zero taxes being levied on income up to Rs 12 lakh might seem like an exemption. Nevertheless, it actually qualifies as a rebate under Section 87A of the ITA. This implies that the zero tax liability is only applicable if the aggregate taxable income, post deductions under the updated tax system, does not exceed Rs 12 lakh.

Rebates under Budget 2025

As per the Budget 2025, the proposed changes to the tax rebate structure now ensure that taxpayers earning up to Rs 12 lakh will have their tax liability completely offset by the rebate, rather than receiving a complete tax exemption. 

This means that individuals in the nil tax slab are still subject to tax, but the rebate eliminates their final tax liability. The maximum rebate amount is set at Rs 60,000, applicable to taxpayers earning Rs 12 lakh, who will owe tax as per the revised tax slabs.

Deductions under New Tax Regime 2025

Standard Deduction: Salaried employees and pensioners are entitled to a standard deduction of Rs 75,000.
Retirement Benefits: Gratuity and leave encashment received upon retirement are not subject to tax.
Employer Contributions to NPS/PF: Contributions made by the employer towards the National Pension System (NPS) or Provident Fund (PF) are exempt from taxation.
Income from the Agnipath Scheme (Section 80CCH)

Allowances Still Exempt under New Tax Regime 2025

Transfer-Related Allowance: Tax-free transition expenses can be claimed by employees relocating for work.
Conveyance Allowance: Work-related travel allowances are exempt for individuals without employer-provided transportation.
Allowance for Disabled Employees: Transport allowances for disabled employees are tax-free.