Bhubaneswar: Finance Minister Nirmala Sitharaman ushered in the goddess of prosperity ‘Mahalakhsmi’, as hinted by PM Narendra Modi Friday, by proposing an increased income tax rebate for personal income tax upto Rs 12 lakh per annum.

A glance at the Budget fine print brings to fore how the FM has waved her magical wand on the personal income tax payers to boost consumption of the consuming  class. 

As per the Budget document, 

• the basic exemption of Income tax in 2025-26 has been raised to Rs 4 lakh vis-a-vis Rs 3 lakh in Budget 2024-25, 
• Maintained the same standard deduction of Rs 75000 as in Budget 2024-25
• But FM has announced no income tax upto Rs 12 lakh under the section of Rebate on Income tax (section 87A).

WHAT IS REBATE ON INCOME TAX?

This is a tax relief provided to individuals, especially those in the lower-income bracket to ensure that they are not burdened with income tax if their income is below a certain threshold. 

As on March end 2025, under the new tax regime, a tax rebate is available on income up to Rs. 7 lakh and up to Rs. 5 lakh under the old regime.

In the Budget 2025-26, the Finance Minister has raised the limit under this section to Rs 12 lakh.

WHO ARE ELIGIBLE UNDER REBATE ON INCOME TAX?

This rebate is not applicable to Hindu undivided families, corporate and firms.

(See the image below.)

HOW PERSONAL TAX ASSESSED?

Here is an illustration.

• The basic tax exemption raised to Rs 4 lakh from 3 lakh earlier
• This means an individual having a monthly salary of Rs 33,333 are totally exempted from tax paying/tax filing.
• However, if your monthly salary exceeds the above cited amount, then you are liable to pay income tax.
• And the rates applied as per slabs announced
• However, as per section 87 A of IT Act, in order to provide tax rebate to individuals in the lower income bracket, you can avail income tax rebate.

HOW THIS OPERATIONALISE?

 In the current Budget 2025-26, the FM has raised the threshold limit to avail the rebate to Rs 12 lakh from 7 lakh last year.

So, if the income of an individual exceeds Rs 12,00,000 and tax payable on such income is exceeding the income amount over and above Rs.12,00,000, then the tax will be limited to the extent of such income exceeding Rs. 12 lakhs. 

Step I – Calculate excess above Rs.12 lakhs Total income (A)

Step II  - Compute income-tax liability on total income (B)

Step III – if B>A, rebate under section 87A would be  (B-A).

LIVE EXAMPLE

• Suppose an Individual’s monthly salary is Rs 1 lakh, his annual income amounts to Rs 12 lakh.
• Though, the basic tax exemption is Rs 4 lakh per annum or Rs 33,333 per month, the individual with Rs 1 lakh will get IT rebate. 
• He will not have to pay any personal income tax.
• But for an individual having a monthly income of over Rs 1.2 lakh per month, how the rebate apply is given below

HOW THE REBATE CALCULATED?

• In the supposed case of Rs 1.2lakh/month salary, the annual income amounts to Rs 14.4 lakhs.
• So, the taxable salary than comes out to be Rs2.4 lakh.
• Since the Finance Minister has announced basic tax exemption up to Rs 4 lakh, you are not liable to pay tax. 
• Only if after deducting Rs 12 lakh rebate amount, your income crosses the basic exemption of Rs 4 lakh, then only your liable to pay tax as announced by the FM in her tax slab rates (see the image given below)

More over, as the FM has effected rationalisation uo tax rates under various tax slabs, she has present how it boils to individuals with different incomes. The illustration the FM given is presented below.