Understanding the Tax Calculation: A Surprising Outcome

In the latest financial update, a peculiar tax scenario has emerged under the new tax regime. Individuals earning up to ₹12.75 lakh annually can take home their entire salary without paying any income tax. However, those earning ₹13 lakh may end up with a lower net income due to tax deductions. Let's break down the calculations to understand why this happens.

Government’s Latest Tax Reforms: Major Relief for Salaries Up to ₹12 Lakh

Union Finance Minister Nirmala Sitharaman introduced significant changes in Budget 2025, providing full tax exemption for individuals earning up to ₹12 lakh per annum. This exemption is available after accounting for the standard deduction and the revised tax rebate. Earlier, the tax rebate applied to incomes up to ₹7 lakh, but it has now been extended to ₹12 lakh.

Tax Calculation for ₹12.75 Lakh Annual Income (New Tax Regime)

If your salary is ₹12.75 lakh, let’s analyze whether you need to pay tax:

• Standard Deduction: ₹75,000
• Taxable Income: ₹12,75,000 - ₹75,000 = ₹12,00,000

Tax Slabs Under the New Regime:

• Income up to ₹4 lakh: 0% tax → ₹0
• ₹4 lakh – ₹8 lakh: 5% tax → ₹20,000
• ₹8 lakh – ₹12 lakh: 10% tax → ₹40,000
• Total Tax Before Rebate: ₹20,000 + ₹40,000 = ₹60,000
• Tax Rebate (Section 87A): ₹60,000
• Final Tax Liability: ₹60,000 - ₹60,000 = ₹0

Thus, individuals earning ₹12.75 lakh do not have to pay any tax, making their take-home salary ₹12.75 lakh.

Tax Calculation for ₹13 Lakh Annual Income (New Tax Regime)

Now, let’s examine the tax liability for an annual salary of ₹13 lakh:

• Standard Deduction: ₹75,000
• Taxable Income: ₹13,00,000 - ₹75,000 = ₹12,25,000

Tax Slabs Under the New Regime:

• Income up to ₹4 lakh: 0% tax → ₹0
• ₹4 lakh – ₹8 lakh: 5% tax → ₹20,000
• ₹8 lakh – ₹12 lakh: 10% tax → ₹40,000
• ₹12 lakh – ₹12.25 lakh: 15% tax → ₹3,750

Total Tax Before Cess: ₹20,000 + ₹40,000 + ₹3,750 = ₹63,750

• Health & Education Cess (4%): ₹2,550
• Total Tax Liability: ₹63,750 + ₹2,550 = ₹66,300
• Net Take-Home Salary: ₹13,00,000 - ₹66,300 = ₹12,33,700

At first glance, this means that an individual earning ₹12.75 lakh takes home ₹12.75 lakh, while someone earning ₹13 lakh takes home only ₹12.33 lakh after tax. To prevent this anomaly, the government has introduced Marginal Relief provisions.

What Is Marginal Relief and How Does It Work?

Marginal Relief is a provision designed to ensure that individuals earning slightly more than the tax-free limit do not end up with a lower take-home salary than those earning less.

Marginal Relief Calculation for ₹13 Lakh Salary

• Additional Income Over ₹12 Lakh: ₹1,00,000
• Tax Liability Without Marginal Relief: ₹66,300
• Maximum Tax That Should Be Paid Under Marginal Relief: ₹25,000

To ensure fairness, the tax liability is adjusted to ₹25,000 instead of ₹66,300, making the final take-home salary ₹12,75,000—equal to that of someone earning ₹12.75 lakh.

Conclusion: New Tax Regime Benefits Salaries Up to ₹12.75 Lakh

This calculation highlights the impact of the revised tax structure, where individuals earning ₹12.75 lakh or less benefit from zero tax liability, while those slightly above this threshold receive Marginal Relief to ensure fairness.

Note: These calculations are based on the new tax regime. If you opt for the old tax regime, the deductions and exemptions may vary.