Finance Minister Nirmala Sitharaman’s Budget 2025 announcement of zero tax for incomes up to ₹12 lakh under the new regime sparked celebrations among India’s middle class. But before you start planning that luxury vacation with your “saved” tax money, hold on—this policy isn’t the blanket exemption it appears to be. Hidden in the fine print are nuances that could leave taxpayers either pleasantly surprised or unpleasantly blindsided. Here’s the untold story.

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1. The “Zero Tax” Mirage: Rebate ≠ Exemption

The government didn’t exempt income up to ₹12 lakh—it introduced a rebate under Section 87A. Here’s the difference:

- Exemption: Income isn’t taxed at all.

- Rebate: Tax is calculated as per slabs, then reduced by a fixed amount (₹60,000 for ₹12 lakh earners) to bring liability to zero .

For example, a ₹12 lakh income would normally incur ₹60,000 in tax (5% on ₹4–8 lakh + 10% on ₹8–12 lakh). The rebate wipes this out. But if your income crosses ₹12 lakh by even ₹1, the entire slab-based tax applies—unless marginal relief kicks in (more on that later) .

The Catch: This isn’t a free pass. Your tax liability is still *calculated* before being canceled out. Cross the threshold, and you’re back in the tax net.

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2. NRIs Need Not Apply

Non-resident Indians (NRIs) earning in India through rent, capital gains, or interest were quick to ask: “Do they qualify?” The answer? A hard no.

Section 87A’s rebate is exclusive to resident Indians, including “resident but not ordinarily resident” (RNOR) individuals. NRIs, even with taxable income below ₹12 lakh, must pay taxes without the rebate . Why? The logic is that NRIs may already owe taxes in their country of residence, and India’s policy prioritizes relief for domestic earners .

The Catch: An NRI earning ₹11 lakh from Indian rent could still owe taxes, while a resident with the same income pays nothing.

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3. Capital Gains: The Silent Tax Bombshell

The ₹12 lakh rebate applies only to “normal income” like salary or business profits. Capital gains (from stocks, property, etc.) are taxed separately at special rates and don’t count toward the rebate threshold.

Imagine you earn ₹10 lakh from salary and ₹3 lakh from selling stocks. Your total income is ₹13 lakh, but only the salary qualifies for the rebate. The capital gains portion (₹3 lakh) is taxed at 15% (short-term) or 20% (long-term), leaving you with a ₹45,000–60,000 bill .

The Catch: Your “tax-free” salary could still leave you paying taxes if you have capital gains—even if your total income stays under ₹12 lakh.

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4. Marginal Relief: A Double-Edged Sword

Earning slightly over ₹12 lakh? The government offers marginal relief to prevent a ₹1 income hike from triggering a massive tax spike. For instance:

- Income: ₹12.3 lakh

- Tax as per slabs: ₹67,080 (incl. cess)

- Marginal relief: caps tax at ₹30,000 (the excess over ₹12 lakh) .

But here’s the twist: If your salary jumps from ₹12.75 lakh (post standard deduction) to ₹13.5 lakh, the entire raise could be swallowed by taxes. A ₹63,750 increment might result in a ₹63,750 tax bill, leaving your take-home pay unchanged .

The Catch: Small raises near the threshold might *feel* like no raise at all.

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5. Old vs. New Regime: The Eternal Dilemma

The new regime’s allure fades if you rely on deductions (like HRA, home loan interest, or Section 80C). While the old regime retains exemptions, its slabs are less forgiving:

- Old regime: 30% tax kicks in at ₹10 lakh.

- New regime: 30% starts at ₹24 lakh .

Example: A ₹15 lakh earner saves ₹35,000 in the new regime but loses ₹1.5 lakh in deductions. For high savers, the old regime might still win .

The Catch: Choosing the wrong regime could cost you lakhs.

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The Bottom Line

The ₹12 lakh rebate is a boon for residents with simple income structures. But for NRIs, investors, or those flirting with the threshold, the devil is in the details. As tax expert Ajay R. Vaswani advises, “NRIs must assess residency status and explore DTAA benefits. Residents should model scenarios before opting for regimes” .

In the end, tax policies—like free lunches—rarely exist. The ₹12 lakh “zero tax” promise is no exception. Plan wisely, or let the fine print surprise you.

For deeper insights, explore double taxation treaties, consult a CA, or read the Finance Bill 2025—preferably with coffee.

Zero Tax Under ₹12 Lakhs Income: But There’s Always a Catch