Proposed New Income Tax Calculations: Is your salary Rs 12,78,500/year? Will you be taxed on Rs 3,500 or the entire amount?

The existing new tax regime came into existence in the year 2020-21. It went through significant changes in 2023 when Sitharaman announced an improved rebate, modified tax slabs, reduced surcharges, and an extension of the standard deduction. The new tax regime was also made a default choice for new taxpayers. However, the taxpayers are still allowed to choose or switch to the new or the old tax regime

The existing new tax regime and the old tax regime are the only taxpayer choices for the current financial year (FY 2024-25).

Tax Slab for FY 2024-25 Tax Rate Up to Rs 3 lakh NIL Rs 3 lakh - Rs 7 lakh 5% Rs 7 lakh - Rs 10 lakh 10% Rs 10 lakh - Rs 12 lakh 15% Rs 12 lakh - Rs 15 lakh 20% Above Rs 15 lakh 30%

The Finance Minister announced it during her 2025 budget speech. While tax slabs were revised, a new tax slab of 25 per cent was added for taxpayers earning Rs 20 lakh-Rs 24 lakh income.

For individuals in the high-income bracket, a big relief was that the 30 per cent income tax slab will now start from Rs 24,00,000. In the existing system, it starts from Rs 15,00,000.

Income Tax Slabs Tax Rate Upto Rs. 4,00,000 NIL Rs. 4,00,001 - Rs. 8,00,000 5% Rs. 8,00,001 - Rs. 12,00,000 10% Rs. 12,00,001 - Rs. 16,00,000  15% Rs. 16,00,001 - Rs. 20,00,000 20% Rs. 20,00,001 - Rs. 24,00,000 25% Above Rs. 24,00,000  30%

The most important aspect of the proposed new tax regime was that the tax-free income limit for non-salaried class individuals was increased to Rs 12,00,000. For salaried-class individuals, it was increased to Rs 12,75,000. The tax-free income limit (after a rebate) in the existing new tax regime is Rs 7,00,000.

Under Section 87A of the Income Tax Act, 1961, the maximum rebate limit was increased to Rs 60,000. As per the slabs, the income tax on an annual income of Rs 12,00,000 is Rs 60,000. So after a full Rs 60,000 rebate, the income becomes tax-free.

A standard deduction of Rs 75,000 will be applicable only to salaried-class individuals. Because of it, their annual income up to Rs 12,75,000 will be tax-free.  

There are chances that one's salary may be slightly over Rs 12,75,000. Will they get a tax-free income benefit? Will their tax be calculated on the basis of their extra income or an overall income? In such a situation, the rule of marginal relief will come to their rescue.

The rule says that if a taxpayer's income is slightly higher than the tax-free limit, they don't pay more tax than their incremental income.

Let's take the example of 2 salaried individuals, whose annual incomes are Rs 13,00,000, and Rs 13,50,000, respectively. Both will get a standard deduction of Rs 75,000 each, which will make their taxable incomes Rs 12,25,000 and Rs 12,75,000, respectively.

As per tax slabs, income tax on Rs 12,25,000 income without marginal relief will be Rs 63,750 (excluding 4 per cent cess).  But in this case, the taxpayer is earning Rs 25,000 more than the tax-free limit. So, the tax will not be more than the incremental income, which in this case is Rs 25,000. Adding a 4 per cent education and health cess, the total tax liability will be Rs 26,000. 

In case 2, where the taxable income is Rs 12,75,000 tax liability without marginal relief will be 74,150 (including a 4 per cent cess).  However, with marginal relief also, the tax liability will be the same since it is less than the incremental income of Rs 75,000.

 

Now come back to our question. In this case, after a standard deduction of Rs 75,000, the taxable income is Rs 12,03,500.  Without marginal relief, income tax on this income will be Rs 60,525.  However, with a marginal relief, the total tax liability will be Rs 3,640.