'Flaw in...' Former CEA Kaushik Basu reacts to new tax slabs introduced in Budget 2025

Former Chief Economic Advisor Professor Kaushik Basu, in his first reaction to tax relief proposed under the Budget 2025, said the Budget is flawed and will not benefit all taxpayers.

He expressed dissatisfaction with the new tax slabs. Giving an example, Basu wrote that if Person A earns an annual income of Rs 12 lakhs, while Person B earns Rs 36 lakhs. If both individuals receive an additional income of Rs 1 lakh next year, Person A will pay Rs 75k in additional taxes, and Person B, who is three times wealthier, will pay Rs 30k in additional taxes. 

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"Flaw in Income tax rule in new Indian Budget: Person A earns Rs 12 lakhs annually & B earns Rs 36 lakhs. If next year both get an extra income of Rs 1 lakh, the additional tax A will pay is Rs 75k & the additional tax B (who is thrice as rich) will pay is Rs 30,000. This is unfair," Basu wrote on X.

In this budget, Finance Minister Nirmala Sitharaman revealed that individuals earning up to Rs 12 lakh annually will be exempt from paying income tax if they choose the new tax regime. This adjustment in tax policy is aimed at alleviating the financial strain on middle-class taxpayers and represents a notable enhancement from the previous tax-free limit of Rs 7 lakh.

The Finance Ministry has specified that the NIL tax liability applies solely to the New Tax Regime, which has been in effect as the standard since 2023. To benefit from this exemption, individuals only need to submit their Income Tax Return (ITR).

Under the new tax system 2024, a person earning Rs 12 lakh annually would have paid approximately Rs 80,000 in income tax. However, with the updated tax slabs, this tax obligation has been reduced to zero as long as the taxpayer files an ITR to claim the refund.

Since the Budget 2025 announcement, there have been many discussions on the tax relief and who will benefit from the new provisions. Social media platforms were abuzz with discussions that taxpayers with salaries slightly above Rs 12 lakh having to pay Rs 61,500, if Budget 2025 provisions are not applied. 

Tax payable with Rs 12 lakh and Rs 30 lakh salaries

1. Rs 12 lakh salary

In accordance with Budget 2025, Section 87A of the Income Tax Act will now provide marginal relief to taxpayers under the new tax structure. This relief aims to assist individuals whose income slightly surpasses the specified threshold, leading to a tax burden that is greater than the incremental increase in income.

Resident individuals earning between Rs 12 lakh and Rs 12.75 lakh are eligible for marginal relief. Once an individual's income exceeds Rs 12.75 lakh, they will no longer qualify for this relief and will be subject to the standard tax rates determined by the CBDT. The CBDT will calculate the income tax due at Rs 12.1 lakh, Rs 12.5 lakh, and Rs 12.7 lakh levels both with and without the marginal relief benefit.

The tax liability on Rs 12.1 lakh income without marginal relief will be Rs 61,500. And, it will be calculated as follows:

Income Range    Tax rate    Tax Amount
Rs 0-4 lakh    0    Rs 0
Rs 4-8 lakh     5%    Rs 20,000
Rs 8-12 lakh    10%     Rs 40,000
Rs 12-12.1 lakh    15%    Rs 1500
Total tax         Rs 61,500

It is important to note that the marginal relief provision does not apply to income exceeding Rs 12.75 lakh. 

Income (Rs)    Tax payable without marginal relief (Rs)     Tax payable with marginal relief (Rs)
12.1 lakh     61,500    10,000
12.5 lakh    67,500     50,000
12.7 lakh     70,500    70,000
12.75 lakh    71,250    71,250 [No marginal relief]
           
Source: CBDT

2. Rs 30 lakh annual income

Taxes under New Regime:

Gross Income: Rs 30 lakh
Standard Deduction: Rs 75,000
Taxable Income: Rs 29,25,000

Tax under New Tax Regime:

0-4 lakh: Nil
4 lakh - 8 lakh: 5% of 4 lakh = Rs 20,000
8 lakh - 12 lakh: 10% of 4 lakh = Rs 40,000
12 lakh - 16 lakh: 15% of 4 lakh = Rs 60,000
16 lakh - 20 lakh: 20% of 4 lakh = Rs 80,000
20 lakh - 24 lakh: 25% of 4 lakh = Rs 1,00,000
24 lakh - 29.25 lakh: 30% of 5.25 lakh = Rs 1,57,500
Total tax: Rs 4,57,500
Cess (4%): Rs 18,300

Total Tax Liability (New Regime): Rs 4,75,800

It should be noted that individuals who are not residents for tax purposes, such as non-residents and Hindu Undivided Families (HUFs), are not eligible to receive marginal relief benefits.