The Union Budget 2025-26 is being hailed as a “dream budget” for its income tax relaxations. It exempts annual income up to ₹12 lakh from tax but includes a condition that could still make this income taxable. Understanding the fine print is crucial for effective tax planning.
During the Budget 2025 announcement, Finance Minister Nirmala Sitharaman stated, “There will be no income tax payable up to an income of ₹12 lakh (i.e., an average of ₹1 lakh per month, excluding special rate income like capital gains) under the new regime. For salaried taxpayers, this limit will be ₹12.75 lakh, considering a standard deduction of ₹75,000.”
The government has revised the income tax slabs under the new tax regime. Income up to ₹4,00,000 is exempt from tax; income between ₹4,00,001 and ₹8,00,000 is taxed at 5%; income between ₹8,00,001 and ₹12,00,000 is taxed at 10%; income between ₹12,00,001 and ₹16,00,000 is taxed at 15%; income between ₹16,00,001 and ₹20,00,000 is taxed at 20%; income between ₹20,00,001 and ₹24,00,000 is taxed at 25%; and income above ₹24,00,000 is taxed at 30%.
This means the basic exemption limit under the new tax regime has been increased to ₹4 lakh from the previous ₹3 lakh. Additionally, the tax rebate under Section 87A has been raised to ₹60,000, ensuring that individuals with a net taxable income of up to ₹12 lakh will not have to pay any tax.
When Your Income Below Rs 12 Lakh Becomes Taxable…
In her Budget speech, FM Nirmala Sitharaman clarified that the ₹12 lakh income should exclude “special rate income such as capital gains.” For example, if a person earns ₹12 lakh annually—₹10 lakh as salary and ₹2 lakh as capital gains—the ₹10 lakh salary income will be tax-free, but the ₹2 lakh capital gain will be taxed at the applicable rate.
What Are Current Tax Rates On Special Incomes?
In India, capital gains tax rates and holding periods vary based on the type of asset and the duration for which it is held. The Union Budget 2024 introduced significant changes to the taxation of capital gains, which remain applicable in the 2025-26 fiscal year.
Listed Equity Shares and Equity-Oriented Mutual Funds:
- Short-Term Capital Gains (STCG): Assets held for less than 12 months are taxed at 20%.
- Long-Term Capital Gains (LTCG): Assets held for 12 months or more are taxed at 12.5% without indexation benefits. Gains up to Rs 1.25 lakh are exempt; amounts exceeding this are taxable.
Debt-Oriented Mutual Funds:
- Short-Term Capital Gains: For holdings of less than 24 months, gains are taxed at the individual’s applicable income tax slab rates.
- Long-Term Capital Gains: For holdings of 24 months or more, if acquired prior to April 1, 2023, gains are taxed at 12.5% without indexation. For acquisitions on or after April 1, 2023, gains are taxed at applicable slab rates without indexation benefits.
Immovable Property (Real Estate):
- Short-Term Capital Gains: Properties held for less than 24 months are taxed according to the individual’s income tax slab rates.
- Long-Term Capital Gains: Properties held for 24 months or more:
- Acquired before July 23, 2024: Taxed at 20% with indexation or 12.5% without indexation.
- Acquired on or after July 23, 2024: Taxed at 12.5% without indexation.
Unlisted Shares:
- Short-Term Capital Gains: For holdings of less than 24 months, gains are taxed at the individual’s applicable income tax slab rates.
- Long-Term Capital Gains: For holdings of 24 months or more, gains are taxed at 12.5% without indexation benefits.
These rates are subject to applicable surcharges and cess.
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