This article describes the tax benefits announced in Budget 2025 applicable to retirees and other fixed-income investors.

This article is a part of our detailed article series on Union Budget 2025. Ensure you have read the other parts here: Show/Hide

📚 Topics covered:

• How much income is tax-free from 1st April 2025 onwards?
• How does the calculation work?
• How to know how much can be kept for tax-free income as per the Budget 2025?
• How to use the above table in practice?

How much income is tax-free from 1st April 2025 onwards?

Budget 2025 declared that any income below ₹12.75 lakhs (₹12 lakhs plus ₹75,000 standard deduction) will be tax-free in the new tax regime. However, the standard deduction of ₹75,000 is available only for salary and pension income. For retirees without salary and pension, the ₹12 lakhs exemption from dividends, interest, rent and bonds coupon offers a significant benefit which we will now cover.

This declaration opens up the opportunity for higher tax-free income for retirees, senior citizens and early retirement (FIRE) aspirants who can now plan for a higher allocation towards assets producing income under ordinary tax rates.

As per Budget 2025 (as announced on 1-Feb-2025),

Old tax Regime slabs for post-deduction income are:

• 0-2.5L - no tax
• 2.5-5L @ 5%
• 5-10L @ 20%
• 10L+ @ 30%

New tax Regime slabs for post-deduction income are:

• 0-4L - no tax
• 4-8L @ 5%
• 8-12L @ 10%
• 12-16L @ 15%
• 16-20L @ 20%
• 20-24L @ 25%
• 24L+ @ 30%

Note: The new tax regime slabs are as of Union Budget 2025 announced on 1-Feb-2025. Standard deduction is at ₹75,000 (same as Budget 2024) for income from salary and pension. Please keep in mind that offset of capital gains say under Section 111A, 112 etc (stocks and mutual funds) will not be available in the amounts above the threshold 4L no-tax threshold.

This means that income up to ₹12.75L (including the standard deduction) will be tax-free but if you have say ₹3 lakhs of equity long-term capital gains, it will still be taxable at 12.5% above 1.25L. Though taxable income starts after 4 lakhs as per the slabs, there is no tax until ₹12.75lakhs (₹12 lakhs for non-salaried) due to marginal relief.

There is also a concept of marginal relief, under Section 87A, up to ₹71,250 so that some one with ₹12,75,001 income is not hit with ₹71,250 tax just because of being over the threshold by ₹1. In Budget 2025, 87A relief has been raised to ₹60,000 for income up to ₹12 lakhs. 87A rebate is not available for NRIs.

Previous to Union Budget 2025, the new regime slab rates were:

• 0-3L no tax, 3-7L @ 5%, 7-10L @ 10%, 10-12L @ 15%, 12-15L @ 20%, 15L+ @ 30% with ₹75,000 standard deduction as per Budget 2024 (applicable to FY 2024-25)
• 0-3L @ 0%, 3-6L @ 5%, 6-9L @ 10%, 9-12L @ 15%, and 15L+ @ 30% with ₹50,000 standard deduction as per Budget 2023 (applicable to FY 2023-24)

How does the calculation work?

₹12.75 lakhs per person is tax-free. If this income comes from a portfolio offering an average of 5% income from interest, rent, coupons and dividends, then each investor can hold

12 / 5% = ₹2.4 cr assets tax-free

For spouses, this amount doubles to ₹4.8 crore and the monthly income is ₹12 * 2 / 12 = ₹2 lakhs. This income is completely safe since most of the big banks offer long-term FDs above 5%. You don’t have to actively look for banks with dubious track records to get 5% from FDs.

It should be kept in mind that capital gains, from stocks / Mutual funds / Real estate etc. are not a part of this tax-exempted limit. For example, if you have interest income and capital gains of ₹10 lakhs each, then the interest income is tax free but the capital gains will be taxable at specific rates from 10%-30% or slab rates above the basic ₹4L exemption limit.

How to know how much can be kept for tax-free income as per the Budget 2025?

We can generalise the calculation to find out how investors investing either singly or as a couple can allocate their portfolio to these investments and still pay no tax in FY 2025-26:

Note: Beyond 7%, it becomes increasingly difficult to create a stable income stream via fixed-income investments only. All values beyond 7% are for reference only and should not be considered practical.

In the table above, a couple with around ₹10 crores invested half in the name of each spouse investing in a mix of rental income and dividends at 2.5% will make ₹24L/year (or ₹2 lakhs/month) and still pay no tax.

How to use the above table in practice?

Interest-bearing investments form a part of Bucket 2 of a retirement portfolio for both normal and early (FIRE) retirees.

The concept of the 3-bucket retirement portfolio creates three risk-based asset pools or buckets within the retirement portfolio:

• Bucket 1: Cash for short-term expenses (3-5 years) and emergency fund (12 months of expenses)
• Bucket 2: Debt assets for portfolio stability and income
• Bucket 3: Inflation-beating assets like equity mutual funds and direct equity stocks

Related:
How to construct buckets for your retirement portfolio?

Using the table above allows us to know at a glance the maximum that can be allocated to Bucket 2 to generate enough income to feed Bucket 1 (and day-to-day expenses) and yet minimise tax.

Ultimately, the retiree portfolio will look like the chart above, with each bucket changing over time as retirement progresses. Any excess income from Bucket 2 will be taxable.