The Indian government's 2025 budget announcement has led to some confusion regarding tax exemptions and filing requirements. Many taxpayers believe that if their income is below ₹12 lakh, they are not required to pay taxes or file returns. However, this is not entirely accurate. While individuals earning up to ₹12 lakh may not have a tax liability, they are still required to file their tax returns. Let's break down why this is the case.

The government has not entirely exempted individuals earning up to ₹12 lakh from taxation. Instead, they have introduced a rebate, a mechanism that allows individuals within this income bracket to get a reduction in their tax liability. The tax slabs still apply, and taxes are calculated accordingly, but the rebate effectively brings the payable tax to zero for people who have their income upto Rs 12 lakh.

The rebate does not apply to special incomes such as capital gains; it is strictly for normal income like salaries and business profits.

Why Filing Returns is Still Mandatory?

1. Government Monitoring and Compliance: Even if you don't have to pay taxes due to the rebate, the government requires you to file returns to keep track of income distribution. This helps authorities monitor taxpayers and ensure compliance.

2. Income Proof for Loans and Financial Transactions: Filing an Income Tax Return (ITR) is essential for availing loans, credit cards, and other financial services. Banks and financial institutions often require ITRs as proof of income, even if no tax is paid.

3. Claiming Refunds and Benefits: If tax has been deducted at source (TDS) from your salary or bank interest, you can only claim a refund by filing a tax return. Additionally, many government benefits and subsidies require ITR proof.

4. Future Tax Slabs: If your income grows beyond ₹12 lakh in the future, you will be taxed on your entire income. Filing regularly ensures a smooth transition and avoids penalties for non-compliance.

Tax Slabs: The income tax slabs are structured as follows:

Up to ₹4 lakh: Nil tax

₹4 lakh to ₹8 lakh: 5% tax

₹8 lakh to ₹12 lakh: 10% tax

For salaried individuals, a standard deduction of ₹75,000 applies, increasing the effective tax-free threshold to ₹12.75 lakh.
Marginal Relief

What Happens If You Earn More Than ₹12 Lakh?

For Individuals earning slightly above ₹12 lakh (up to approximately ₹12.75 lakh) may benefit from marginal relief, which prevents a sharp increase in tax liability. For example, a person earning ₹12.1 lakh would owe significantly less tax due to this provision.