What does no income tax up to ₹12 lakh really mean? Decoding differences between tax rebate, deduction & exemption

In the Union Budget 2025, Finance Minister Nirmala Sitharaman mentioned that the ‘nil income tax’ slab would be raised to ₹12 lakh; however, it is often misunderstood as a tax exemption or tax deduction. Here's what it really means.

What did FM Nirmala Sitharaman say?

“To taxpayers up to Rs12 lakh of normal income (other than special rate income such as capital gains) tax rebate is being provided in addition to the benefit due to slab rate reduction in such a manner that there is no tax payable by them,” FM Nirmala Sitharaman said during the budget speech.

Hence, a tax rebate will be provided to those earning up to ₹12 lakh under the new tax regime.

What is a tax rebate?

According to Section 87A of the Income Tax Act, a tax rebate is tax relief provided to individuals who earn up to a certain threshold. It is claimed from the total tax payable. A tax rebate is not deducted from income. Hence, a tax rebate reduces the total tax payable by deducting a fixed amount from the calculated tax.

The newly proposed tax rebate structure effectively cancels out the tax payable for taxpayers earning up to ₹12 lakh instead of a total tax exemption. Hence, nil tax slab means tax is applicable, but the rebate brings the final tax liability to zero. The maximum rebate available is ₹60,000, which is for a taxpayer with an income of ₹12 lakh, on which tax is payable as per the new slabs.

How does this work?

For income up to ₹4 lakh, 0 tax is levied.

For income between ₹4 and ₹8 lakh, a 5 per cent tax or up to ₹20,000 is charged.

For income between ₹8 lakh and ₹12 lakh, 10 per cent tax or up to ₹40,000 is levied.

The total rebate under 87A is ₹60,000 according to Budget 2025. Hence it cancels out the total estimated tax of ₹60,000 ( ₹40,000+ ₹20,000).

How is a tax rebate different from a tax exemption?

An income tax exemption is provided on certain sources of income, not entirely on the total income. This means that, depending on the nature of the income, a part of it may remain non-taxable. While calculating tax liability, exempt incomes are the first components that get reduced from your salary or other income. The tax exemption for income up to ₹4 lakh is zero, according to the Budget 2025 speech.

How is it different from tax deductions?

Tax deductions are claims made to reduce taxable income from various investments and expenses incurred by a taxpayer, reducing the overall tax liability. They subtract certain expenses from the total income.