A sub-label can carry its own color, independent of its parent
A nested sub-label doesn't have to inherit its parent label's color -- you can set each sub-label's color separately, which is useful for something like color-coding individual projects nested under a single "Work" label.
Removing a color resets a label to Gmail's default gray
If a custom or preset color stops being useful, open the same "Label color" menu and choose the default option (usually shown as "No color" at the top of the palette) to reset the label to plain gray text without deleting the label itself.
Frequently Asked Questions
Can I set a custom color beyond the provided palette?
Yes. Click "Add custom color" near the bottom of the color palette to choose your own exact background and text color.
Can a sub-label have a different color from its parent label?
Yes. Each sub-label's color is set independently, so a sub-label can use a completely different color from the label it's nested under.