Introduction
Tax season often brings a whirlwind of confusion, especially with changing regulations and new tax regimes. One topic that’s been creating a buzz lately is the claim that income up to ₹12.75 lakhs is tax-free under the new tax regime. But is this entirely accurate? Let’s dive deep into this topic and clear the air with real-life scenarios that break down how tax-free income truly works.
Understanding the Basics
The confusion primarily arises from the interplay between the standard deduction and the tax rebate under Section 87A. To simplify, while your gross income might be up to ₹12.75 lakhs, deductions and rebates play a significant role in determining your actual tax liability.
Scenario 1: Income ₹11.5 Lakhs (Less than ₹12 Lakhs)
- Details: If your annual income is ₹11.5 lakhs, it’s below the ₹12 lakh threshold.
- Impact: You qualify for a full rebate under Section 87A.
- Tax Outcome: Total tax = ₹0. You pay absolutely no tax, thanks to the rebate.
Scenario 2: Income ₹12.75 Lakhs (Between ₹12L and ₹12.75L)
- Details: With a standard deduction of ₹75,000, your taxable income reduces to ₹12 lakhs.
- Impact: You still qualify for a 100% rebate, as the taxable income doesn’t exceed ₹12 lakhs.
- Tax Outcome: Again, total tax = ₹0. No tax payable.
Scenario 3: Income ₹13 Lakhs (More than ₹12.75 Lakhs)
- Details: After the standard deduction, taxable income = ₹12.25 lakhs.
- Impact: Since your income exceeds ₹12.75 lakhs, the rebate is NOT available.
- Tax Calculation:
- ₹0 – ₹4L: No tax
- ₹4L – ₹8L: 5% on ₹4L = ₹20,000
- ₹8L – ₹12L: 10% on ₹4L = ₹40,000
- ₹12L – ₹12.25L: 15% on ₹0.25L = ₹3,750
Total Tax Before Marginal Relief: ₹63,750
Considering Marginal Relief, the applicable tax liability reduces to ₹25,000 + cess.
Key Takeaways
- Income up to ₹12.75L can be tax-free, thanks to the rebate.
- Income above ₹12.75L results in full tax liability from ₹4L onwards.
- The basic exemption limit is ₹4L, not ₹12L.
- This applies exclusively to the New Tax Regime.
- Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG) are taxed separately.
- Applicable only for Resident Individuals.
Final Thoughts
Understanding taxes can be tricky, but a little clarity can go a long way. The new tax structure offers benefits, but it’s essential to plan smartly. Knowing where you stand in these income brackets helps you make informed financial decisions, potentially saving you a significant amount.
Does this new structure benefit you? Share your thoughts in the comments below!
