12 Lakh Tax-Free Limit: New Tax Regime Explained

The Indian tax system is a complex web of rules and regulations, often leaving taxpayers confused about their obligations. However, recent changes in the tax regime have brought some much-needed relief, particularly for those with moderate incomes. In this article, we will delve into the details of how up to 12 lakh of income can be tax-free under the new tax regime.

 

Understanding the Basics

Before we dive into the specifics, let’s clarify some fundamental concepts. The Indian tax system operates on the principle of progressive taxation, meaning that higher incomes are taxed at higher rates. There are two main tax regimes: the old regime and the new regime. The old regime allows for various deductions and exemptions, while the new regime offers lower tax rates but with fewer deductions.  

The New Tax Regime: A Closer Look

The new tax regime was introduced to simplify the tax system and provide lower tax rates to individuals. Under this regime, individuals can choose to forgo certain deductions and exemptions in exchange for lower tax rates. The new regime has gained popularity due to its simplicity and the potential for significant tax savings for certain individuals.  

The 12 Lakh Tax-Free Limit

One of the most significant features of the new tax regime is the increased tax rebate under Section 87A. This rebate allows individuals with a net taxable income of up to 12 lakh to pay no income tax. This is a substantial increase from the previous limit of 5 lakh, providing significant relief to middle-income taxpayers.  

How Does it Work?

The 12 lakh tax-free limit is achieved through a combination of basic exemption limit and tax rebate. The basic exemption limit is the amount of income that is not taxed at all. For the financial year 2023-24, the basic exemption limit under the new regime is 3 lakh. In addition to the basic exemption limit, individuals can also claim a tax rebate under Section 87A. This rebate is available to individuals with a net taxable income of up to 12 lakh. The amount of the rebate is equal to the tax payable on the income, effectively making it tax-free.  

Example:

Let’s say an individual has a net taxable income of 12 lakh. Under the new tax regime, the tax payable on this income would be calculated as follows:

  • On the first 3 lakh: 0% tax
  • On the next 6 lakh (3 lakh to 9 lakh): 5% tax = 30,000
  • On the remaining 3 lakh (9 lakh to 12 lakh): 10% tax = 30,000
  • Total tax payable: 60,000

However, since the individual’s net taxable income is within the 12 lakh limit, they can claim a rebate of 60,000 under Section 87A. This effectively reduces their tax liability to zero.

Who Benefits the Most?

The 12 lakh tax-free limit under the new tax regime is particularly beneficial for individuals with moderate incomes. These individuals may not have access to many deductions and exemptions, making the new regime a more attractive option. Additionally, the increased tax rebate provides significant relief to middle-income taxpayers, allowing them to save more of their hard-earned money.  

Other Important Information

  • Marginal Relief: The tax laws also provide for marginal relief in cases where the income slightly exceeds the tax-free limit. This ensures that individuals with income slightly above the limit are not penalized disproportionately.  
  • Standard Deduction: Salaried individuals can also claim a standard deduction of 50,000, further reducing their taxable income.  
  • Comparison with Old Regime: While the new regime offers lower tax rates, it is essential to compare it with the old regime to determine which one is more beneficial for you. Consider your income, deductions, and exemptions before making a decision.  
  • Tax Planning: It is always advisable to consult with a tax advisor to understand the intricacies of the tax system and plan your taxes effectively.

Data and Statistics

  • According to the Income Tax Department, the number of individuals filing income tax returns in India has been steadily increasing over the years. This indicates a growing awareness of tax compliance among citizens.
  • The new tax regime has been gaining popularity among taxpayers, with a significant number of individuals opting for it in recent years.  
  • The increased tax rebate under Section 87A has provided significant relief to middle-income taxpayers, allowing them to save more money.

FAQs

Q: Is the ₹12 lakh tax-free limit applicable to everyone?

A: The ₹12 lakh limit is achieved through the basic exemption limit combined with the Section 87A rebate. While everyone benefits from the increased basic exemption limit, the full ₹12 lakh benefit (via the rebate) is specifically for individuals with a net taxable income up to ₹12 lakh. Those earning above this amount will still pay tax, though they might still find the new regime advantageous.

Q: Do I have to choose the new tax regime?

A: No, you can choose between the old tax regime and the new tax regime every year. It’s crucial to compare both regimes based on your income, deductions, and investments to determine which one is more beneficial for you.

Q: Can I switch back to the old regime after choosing the new regime?

A: Yes, individuals (other than those with business income) can switch back to the old regime from the new regime. However, if you have business income, the rules for switching are different.

Q: What is the difference between the basic exemption limit and the tax rebate?

A: The basic exemption limit is the amount of income on which no tax is calculated at all. The tax rebate under Section 87A is a reduction in your tax liability. It’s applied after the tax is calculated on your taxable income.

Q: If I choose the new tax regime, can I still claim any deductions?

A: Under the new regime, you forgo many deductions and exemptions available in the old regime. However, some standard deductions, like the one for salaried individuals, may still be applicable. It’s essential to review the specific deductions allowed.

Q: Which deductions and exemptions are not available in the new tax regime?

A: Many common deductions like those under Section 80C (for investments like PPF, life insurance premiums), 80D (for health insurance), HRA (house rent allowance), and others are typically not available in the new regime.

Q: Is the new tax regime always better?

A: No. The best regime depends on your individual financial situation. If you are claiming many deductions and exemptions under the old regime, that might still result in lower taxes for you. If you are not utilizing many deductions and exemptions, the new regime is generally simpler and may result in lower taxes.

Q: How is the net taxable income calculated?

A: Net taxable income is calculated by reducing eligible deductions and exemptions from your gross income. However, under the new regime, many of these deductions are not available.

Q: Where can I find more information about the new tax regime?

A: The official website of the Income Tax Department of India is the best resource for accurate and up-to-date information on tax laws and regulations. Consulting with a qualified tax advisor is also recommended.

Q: I am a senior citizen. Does this change anything for me?

A: Senior citizens also have the option to choose between the old and new tax regimes. The basic exemption limit may be higher for senior citizens. It is crucial to compare both regimes to see which is more favorable.

Q: I am a salaried employee. Which regime should I choose?

A: Salaried individuals should carefully compare both regimes. Consider your investments, deductions, and exemptions, and calculate your tax liability under both regimes to make an informed decision. The standard deduction is still available in the new regime for salaried individuals.

Conclusion

The new tax regime, with its 12 lakh tax-free limit, has brought much-needed relief to middle-income taxpayers in India. By understanding the provisions of the new regime and planning their taxes effectively, individuals can optimize their tax liability and save more money. However, it is crucial to compare the new regime with the old regime and consider individual circumstances before making a decision. As the tax laws are subject to change, it is always advisable to stay updated and consult with a tax advisor for personalized guidance.


Discover more from ExamQuestIndia: The Best Exam Prep Platform in India

Subscribe to get the latest posts sent to your email.

We will be happy to hear your thoughts

Leave a reply

ExamQuestIndia: The Best Exam Prep Platform in India
Logo