Government Increase Income Tax Exemption Limit to INR 12 Lakh: Here’s Why?

Government Increase Income Tax Exemption Limit to INR 12 Lakh: Here’s Why?

On February 2, 2025, in New Delhi, a decision that will well impact middle-class earners' shoulders, the Union Finance Minister raised the income tax exemption limit from ₹ 7 lakh to ₹ 12 lakh. This is in Favor of an individual earning about ₹ 1 lakh per month, as this will free him from paying income tax.

During an interview with PTI, the finance minister explained the logical reasoning behind such measure stating that of course, the government's tax measures are designed to benefit taxpayers across all income levels.

Tax Slab Reductions and Wider Tax Brackets

At this point, the government is not merely increasing the exemption limit but lowering rates in various slabs and widening the marks between tax brackets to make the whole tax system more equitable and progressive. The Finance Minister stated

“The government feels that if someone earns ₹1 lakh per month on average, they should not have to pay tax. We are achieving this in two ways: first, by reducing slab rates to create a more uniform, gradually progressive structure; and second, by expanding the tax slabs to provide relief across income groups,”.

The government has also revised the tax slabs to make the system more equitable. Below is a comparison between the previous and the newly proposed tax slabs (under New Tax Regime):

Current Tax Slabs (FY 2024-25) (AY 2025-26)

Proposed Tax Slabs (FY 2025-26) (AY 2026-27)

Furthermore, the finance minister indicated that besides slab rate reductions, additional rebates would also be available for certain taxpayers. It was expected that the amount saved by taxpayers would flow back into the economy through consumption, savings, and investments. 

"We decided that some people should receive extra benefits beyond mere slab rate reductions. Hence, an extra rebate was introduced."
— Nirmala Sitharaman, Union Budget 2025 Speech

🔹 Rebate u/s 87A Benefits Under the New Tax Regime! 🔹

In addition to increased exemption limits, the government has introduced rebate benefits to maximize tax relief for individuals. Under the new system:

1. Zero Tax for Incomes up to ₹12 Lakh: Individuals earning up to ₹12 lakh per annum will pay no tax due to the enhanced rebate under Section 87A.

2. Lower Tax for ₹12-18 Lakh Bracket: Taxpayers earning between ₹12 lakh and ₹18 lakh will experience reduced tax rates, effectively lowering their tax burden.

3. Higher Savings for Middle-Income Earners: The rebate ensures that lower and middle-income groups retain more of their earnings, boosting both savings and disposable income while ensuring a fair contribution from higher-income individuals.

Comparison with 2014 Tax Regime

Sitharaman asserted how it is now pretty much taking money back into the pockets of people as compared to the tax regime in force in 2014 under the Congress government. 

In her 2025 Budget speech, Finance Minister Nirmala Sitharaman stated "Compared to the 2014 tax rates, someone earning ₹8 lakh now has nearly ₹1 lakh more in their pockets. In 2014, tax on them was ₹1 lakh; now, it is zero as far as tax on someone above an earning of ₹12 lakh. In 2014, the tax required from an individual earning ₹12 lakh was ₹2 lakh, whereas it is now ₹0. This means ₹2 lakh more bending in towards keeping,".

For further clarity, let’s look at a comparative breakdown of tax calculations:

Impact on Higher Income Groups

The finance minister emphasized that this tax relief goes beyond the income bracket of ₹12 lakh. "Rates are being reduced for everybody. For instance, a person earning ₹24 lakh, who had paid ₹5.6 lakh in 2014, will now just pay ₹3 lakh. That means ₹2.6 lakh more in their pocket," she explained.

This, in fact, happens to be an income booster by trying to develop more disposable income for increased consumer spending, saving, and investing. In effect, such reliefs will help ease financial pressure on the taxpayer while creating a stable economy and a prosperous future. 

Income Tax Software Implications Based on this Step

With the newest recent tax reforms by the government, income tax filing software will again be remodeled for the new exemption limits and slab structures. Using advanced taxation software like EasyOFFICE ensures hassle-free tax computation and compliance. EasyOFFICE software provides automated tax calculations, real-time updates on changes, and a simplified filing process, making tax compliance seamless for professionals and businesses alike.