What does the exemption of RS 12 Lakh mean and how is the tax calculated if you earn more?

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The government has revised the tax structure under the new regime with Finance Minister Nirmala Sitharaman announcing that those earning up to Rs 12 lakh annually won't have to pay any income tax. The proposed changes are part of the latest Budget, which seeks to reduce taxes and leave taxpayers with money in hand. The Finance Minister said this will boost domestic consumption and savings.


But does the tax exemption of up to Rs 12 lakh income mean that a salaried person earning Rs 15 lakh will be taxed only on the remaining Rs 3 lakh? No. The exemption limit exists only for those earning up to Rs 12 lakh. Those with higher taxable income must follow the slab-wise taxation process.

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It is also important to clarify that the income mentioned here is the taxable amount since taxpayers also enjoy an additional standard deduction of Rs 75,000 under the new regime. In practical terms, this will increase the exemption limit to Rs 12,75,000.

The Proposed Tax Slabs

The government has proposed a revised structure under which the tax slabs have been further broken down. The first slab is up to Rs 4 lakh, in which the tax remains nil. Earlier it was Rs 3 lakh. The next slab is Rs 4-8 lakh where the tax rate is 5%, followed by 10% in the Rs 8-12 lakh slab, 15% in the Rs 12-16 lakh slab, 20% in the Rs 16-20 lakh slab, and 25% in the Rs 20-24 lakh slab. It's flat 30% above Rs 24 lakh.


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How Is Income Tax Calculated?

Tax calculation follows a process that breaks down the total income into different slabs, which are then taxed at respective rates. This means one does not pay tax on the entire income at a flat rate. Neither is a salaried person taxed only on the remaining amount after the exempted income.

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For instance, if you earn Rs 15 lakh annually, already excluding Rs 75,000 standard deduction, it does not mean the taxpayer will also enjoy Rs 12 lakh exemption limit.


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As part of the taxation process, the Rs 15 lakh income will first be broken down and the first Rs 4 lakh will be tax-free. A rate of 5% will be applicable on the next Rs 4 lakh (Rs 20,000) under the Rs 4-8 lakh slab. In Rs 8-12 lakh slab, another Rs 4 lakh will be taxed at 10% (Rs 40,000). The remaining Rs 3 lakh falls in the Rs 12-16 lakh slab, attracting a rate of 15%, which calculates to Rs 45,000.


This adds up to Rs 1,05,000 - which will be the total liability on a total taxable annual income of Rs 15 lakh.

Understanding The Rebate

The tax benefit comes in the form of rebate. Even a salaried person earning Rs 12 lakh annually will be taxed as per the slabs. This means, the tax liability will stand at Rs 60,000, which is the sum of Rs 0 (Rs 0-4 lakh at nil tax), Rs 20,000 (Rs 4-8 lakh at 5%), and Rs 40,000 (Rs 8-12 lakh at 10%). But the government provides a full rebate of Rs 60,000, making the total income of Rs 12 lakh tax-free in the hands of the taxpayer.

Is It Better Than Current Structure?

For someone with Rs 12 lakh total income, the total benefit increases to Rs 80,000, which is the tax liability as per the existing structure. The shift from the existing slabs brings an additional relief of Rs 20,000. This was one of the examples cited by the Finance Minister in her Budget speech.

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Let's take the example of Rs 15 lakh income. Under the current structure, the tax liability calculates to Rs 1.4 lakh as against Rs 1.05 lakh under the proposed slabs. This gives a slab relief of Rs 35,000 slab relief. There is no other exemption benefit.

Is It Better Than Old Regime?

The old regime allows exemptions, but the rates are higher. Since the Budget did not mention any change to the old regime, it is safe to assume that it remains unchanged. Under the old regime, any income above Rs 10 lakh was taxed at 30%. Therefore, following the slab rates, someone with Rs 12 lakh taxable income would be taxed Rs 1,72,500. For 15 lakh income, it would be Rs 2,62,500. The final amount will vary based on the exemptions claimed by the taxpayer, who may take a call on opting for the new or old regimes based on an assessment of his financial profile.