Taxes after Budget 2025: How much tax will an individual pay on Rs 36 lakh annual salary if he gets a hike of Rs 1 lakh?

Tax-Budget 2025: During the presentation of the Union Budget 2025-26 in Parliament on February 1, Saturday, Union Finance Minister Nirmala Sitharaman introduced several measures. One of the key proposals in the new tax regime is the complete exemption for individuals earning up to Rs 12 lakh annually. This move aims to provide relief to the middle-class and salaried taxpayers by reducing their tax burden.

Under the new tax system, middle-class individuals and salaried taxpayers earning up to Rs 12 lakh (or Rs 12.75 lakh for those with a basic standard deduction of Rs 75,000) will pay zero income tax. Additionally, the government has introduced new tax slabs to lower middle-class taxes significantly and enhance their disposable income.

While these tax reforms have been welcomed by some, they have also garnered mixed reactions from economists, experts, and taxpayers. Concerns have been raised regarding the tax disparity for income levels above Rs 12 lakh.

Former Chief Economic Advisor Professor Kaushik Basu shared his critique of the proposed tax relief in the 2025 Budget, stating his dissatisfaction with the new taxation regulations.

To illustrate his point, Basu gave an example comparing the additional taxes that Person A and Person B would pay if they each received an extra income of Rs 1 lakh next year. Person A, with an annual income of Rs 12 lakhs, would pay Rs 75k in additional taxes, while Person B, with an annual income of Rs 36 lakhs, would only pay Rs 30k in additional taxes, despite being three times wealthier than Person A.

Reacting to Basu's comments, CA and tax expert Suresh Surana said: "The tweet of Mr. Basu has not considered the impact of health and education cess which is levied on the income tax payable @ 4%. The comparison presented above may not be ideal, as it assumes that the proposed tax rates under the new tax regime will remain the same for both the current year and the next year. However, in reality, the existing slab rates are different, leading to a different tax liability under the current framework."

Elaborating on the tax liability, Surana said: "Under the existing new tax regime, the total tax liability of an individual taxpayer with an income of Rs. 12 lakh is Rs. 1,79,400 (including Rs. 6,900 cess). With the proposed changes, the revised tax liability on Rs. 13 lakh would be Rs. 78,000, resulting in an actual reduction in tax liability of Rs. 1,01,400 (Rs. 1,79,400 less Rs. 78,000)."

Tax liability explained

Income tax slabs under the New Tax Regime after Budget 2025

Income up to Rs 4 lakh: Nil

Income from Rs 4 lakh to Rs 8 lakh: 5 per cent
 
Income from Rs 8 lakh to Rs 12 lakh: 10 per cent
 
Income from Rs 12 lakh to Rs 16 lakh: 15 per cent
 
Income from Rs 16 lakh to Rs 20 lakh: 20 per cent
 
Income from Rs 20 lakh to Rs 24 lakh: 25 per cent
 
Income above Rs 24 lakh: 30 per cent

The below mentioned table provides us a clear understanding of Basu’s tweet :

Considering the aforementioned table, the key reason for the seemingly disproportionate jump in tax for Mr. A upon earning an additional Rs. 1 lakh is the enhanced rebate under Section 87A, which fully eliminates tax liability up to Rs. 12 lakh but ceases to apply beyond this threshold. This abrupt withdrawal leads to a steep increase in tax liability for any additional income.

For higher-income earners like Mr. B, the incremental tax burden remains more gradual, as they do not benefit from the 87A rebate. While this structure may appear imbalanced in specific scenarios, it aligns with the government's intent to provide greater relief to lower and middle-income taxpayers, ensuring a more progressive tax system.