I'm a little confused. The code states that the overcurrent device for an appliance that is rated 13.3a cannot exceed 150 percent.And that a branch circuit for a 120 gal or less water heater can't have a rating of less than 125 percent. A common size for water heaters are usually 4500w.4500 divided by 125% is 23.4, and 4500 divided by 150% is 28.1. So is it legal to use 12guage wire and put it on 25a overcurrent device. Or do I have to go 10gauge and put it on a 25a device.I am aware of section 240-3 for ampacities of conductors on 12g wire .Or am I looking in the wrong place? This is for a house.

As the 18.75 amps (4500/240) is more than 80% of the "normal" ampacity for #12 (20 amps), we/I would install #10 wire. You may be able to use #12 "by the book", but "the book" is minimum!
John