Budget 2025: What Does ₹12 Lakh Tax-Free Income Mean for Middle-Class and Investors

The Union Budget presented on February 1, 2025, brought a historic income tax reform that grabbed the attention of millions of salaried taxpayers and investors alike. The headline announcement was clear: ₹12 lakh income is now completely tax-free under the new regime, excluding capital gains. This change aims to ease the tax burden on the middle class, but it left many investors disappointed because the capital gains tax rates remain unchanged. This post breaks down what these changes mean for salaried individuals, equity investors, and tax planners.

New Income Tax Slabs and What They Mean for Salaried Individuals

The biggest relief for the middle class is the increase in the tax-free income limit to ₹12 lakh under the new tax regime. Salaried individuals can now enjoy a tax-free income of up to ₹12.75 lakh, factoring in a ₹75,000 standard deduction. This is a significant jump from previous years and directly benefits crores of taxpayers.

The new income tax slabs introduced in Budget 2025 are:

• ₹0 to ₹4 lakh: 0% tax

• ₹4 lakh to ₹8 lakh: 5% tax

• ₹8 lakh to ₹12 lakh: 10% tax

• ₹12 lakh to ₹16 lakh: 15% tax

• ₹16 lakh to ₹20 lakh: 20% tax

• ₹20 lakh to ₹24 lakh: 25% tax

• Above ₹24 lakh: 30% tax

  
  

This structure is designed to provide gradual relief and reduce the tax burden on middle-income earners. For example, a salaried individual earning ₹12 lakh will pay no tax on the first ₹12 lakh and only 15% on income between ₹12 lakh and ₹12.75 lakh (due to the standard deduction). This means more take-home pay and increased disposable income for many families.

Why Capital Gains Tax Remained Unchanged and Investor Disappointment

While the middle class cheered the tax-free ₹12 lakh income announcement, equity investors faced disappointment. The capital gains tax rates remain the same:

• Long-term capital gains (LTCG) on equity: 12.5%

• Short-term capital gains (STCG) on equity: 20%

  
  

Many investors expected some relief on LTCG tax, especially since equity markets have been volatile and mutual fund SIP investors have grown significantly in recent years. The unchanged capital gains tax means that profits from selling shares or mutual fund units will continue to be taxed at the same rates.

This decision has sparked questions like why capital gains tax not reduced (12,100 searches) and why the investor class was ignored in this budget. The government’s focus clearly remains on providing relief to salaried middle-class taxpayers rather than equity investors.

Impact on ULIPs and Other Investment Products

Another notable change in Budget 2025 affects Unit Linked Insurance Plans (ULIPs). ULIPs with premiums exceeding ₹2.5 lakh will now be taxed as capital gains. This means that if your annual premium for ULIPs crosses this threshold, the gains from these investments will be subject to capital gains tax at 12.5%.

This move aligns ULIPs with other investment products in terms of tax treatment but may discourage high-premium ULIP investments. Investors who rely on ULIPs for both insurance and investment may need to reconsider their portfolio strategy.

What This Means for Tax Planning and Financial Decisions

For salaried individuals, the new tax slabs and ₹12 lakh tax-free income offer a clear opportunity to save more and plan finances better. Here are some practical takeaways:

• Maximize salary components to stay within the ₹12 lakh tax-free limit where possible.

• Use the ₹75,000 standard deduction fully to increase tax-free income to ₹12.75 lakh.

• Review investments to understand capital gains tax implications, especially if you are an equity investor or ULIP holder.

• Consult tax planners or CAs to optimize tax-saving instruments under the new regime.

  
  

For investors, the unchanged capital gains tax means continued focus on long-term investment strategies that factor in tax liabilities. Mutual fund SIP investors should continue disciplined investing but be aware that gains will be taxed as before.

Why the Focus on Middle-Class Relief and Not Investors?

The Budget 2025 tax free ₹12 lakh announcement reflects the government’s priority to support the salaried middle class, which forms the backbone of India’s economy. With over 33,100 searches for ₹12 lakh tax free and 27,100 searches for Budget 2025 income tax slabs, it is clear that this reform resonates widely.

However, the investor class, including equity holders and mutual fund investors, feels overlooked. The unchanged capital gains tax and new ULIP premium tax rules suggest the government is cautious about reducing revenue from investment taxes. This may be due to fiscal constraints or a desire to maintain tax equity across different income sources.

What to Watch Next After Budget 2025

Taxpayers and investors should keep an eye on:

• Any clarifications or amendments related to capital gains tax in upcoming financial sessions.

• How the new slabs affect overall tax collections and government spending.

• Possible future reforms targeting investor relief, especially if market conditions worsen.

• Changes in ULIP taxation and insurance product regulations.

  
  

Tax planners and students preparing for ISFCM exams should study these changes carefully, as they reflect a significant shift in India’s tax landscape.