Is ?12 LPA Tax-Free? A Practical Guide

A comprehensive guide

Confused about the ?12 lakh tax-free claim?

Our guide clarifies the new tax slabs, helps you understand the exemption limit, and compares new vs. old regimes to help you save money.

Is ?12 LPA tax-free?

The budget announcement by Finance Minister Nirmala Sitharaman, stating no income tax for incomes up to ?12 lakh, has created quite a buzz. Our blog post dissects the ?12 lakh "tax-free" claim for a Joe taxpayer. We'll delve into the new tax regime, explaining how the exemption limit works and how the tax slabs are applied.

The ?12 Lakh "Tax-Free" Claim

Let's get straight to the point: ?12 lakh is not a flat tax-free amount regardless of your total income. It's more accurately described as an exemption limit under the new tax regime. This means that income up to ?12 lakh effectively faces no income tax. However, and this is crucial, the slab system still applies once your income exceeds this limit. Think of it this way: the ?12 lakh limit acts as a threshold. While you won't pay tax on the initial portion of your income up to this limit, the tax slabs come into play for any amount above it. Salaried individuals also have a standard deduction of ?75,000, effectively pushing the tax-free limit to ?12.75 lakh.

Now, why are there tax slabs even if your income is below ?12 lakh? The reason is that these slabs are used to calculate the tax on the portion of your income that falls above the exemption limit.

The New Tax Slabs

The new tax regime features a revised set of income tax slabs. It's essential to understand how these slabs work to accurately calculate your tax liability. Here's a breakdown:

These slabs are applied progressively. This means that different portions of your income are taxed at different rates. The lower slabs are applied to the initial portions of your income, and as your income increases, the higher slabs come into play. Let's illustrate with an example. Suppose your income is ?14 lakh. Here's how the tax is calculated:

First ?4 lakh: 0% tax (?0)

Next ?4 lakh (?4-8 lakh): 5% tax (?20,000)

Next ?4 lakh (?8-12 lakh): 10% tax (?40,000)

Remaining ?2 lakh (?12-14 lakh): 15% tax (?30,000)

Total tax: ?0 + ?20,000 + ?40,000 + ?30,000 = ?90,000

Notice how each slab is applied to the corresponding income bracket. The tax rate applicable to the last rupee you earn is called the marginal tax rate. In this example, the marginal tax rate is 15%. Remember, the ?75,000 standard deduction for salaried individuals is applied before the tax slabs are applied. In the example above, if the individual is salaried, their taxable income would first be reduced by ?75,000 to ?13,25,000, and then the slabs would be applied.

New vs. Old Tax Regime: Which One Should I Choose?

Now, you might be scratching your head at the above question. Understandable. The new regime offers lower tax rates but has fewer deductions and exemptions. The old regime, on the other hand, has higher tax rates but allows for a wide range of deductions and exemptions.

Generally, the new regime might be more beneficial for individuals with fewer eligible deductions or investments or those who simply prefer a simpler tax calculation process. If you don't utilize many deductions like those under Section 80C (investments, life insurance, etc.) or don't have a home loan with substantial interest payments, the lower rates of the new regime could be more advantageous. Conversely, the old regime may be more suitable for those who actively utilize various deductions and exemptions.

Bottom Line…

Let's recap the key takeaways. The ?12 lakh figure represents an exemption limit, not a blanket tax-free amount. While income up to this limit effectively faces no tax, the tax slab system still applies to any income above this threshold. It's important to consider the differences between the new and old tax regimes to determine which one is most beneficial for your circumstances. Have you calculated your taxes under the new regime? Let us help you! Download the JJ TAX APP to access our tax calculators or get in touch with JIA- our expert-powered chat. www.jjfintax.com.