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The recent Budget 2025 announcement regarding a tax-free income up to ₹12 lakh under the new tax regime has created both excitement and confusion among Indian taxpayers. While the headline figure promises significant relief for salaried individuals, a closer examination reveals nuances that significantly impact those with investment income, particularly capital gains. The claim of a completely tax-free income up to ₹12 lakh is misleading, as it fails to account for the separate taxation of various income streams.
The crux of the issue lies in the treatment of special rate incomes, such as short-term capital gains (STCG) from stocks or mutual funds. The Section 87A rebate, which provides a full tax rebate for income up to ₹12 lakh under the new regime, explicitly excludes these types of income. This means that while a salaried individual earning ₹12 lakh might enjoy a complete tax exemption under Section 87A, the addition of any STCG income will result in a separate tax liability. For example, an individual earning ₹8 lakh in salary and ₹4 lakh in STCG will not qualify for complete tax exemption under Section 87A. The ₹8 lakh salary income is eligible for the rebate, but the ₹4 lakh in STCG will be taxed at a flat rate of 20%, resulting in a tax bill of ₹80,000.
The impact of this separate taxation becomes even clearer when comparing STCGs with long-term capital gains (LTCG) on listed equities. While STCGs are taxed at a flat 20%, LTCGs enjoy a more favorable treatment. The first ₹1.25 lakh of LTCG is exempt from tax, and the remaining amount is taxed at 12.5%. Therefore, an individual earning ₹4 lakh in LTCG on listed equities would pay significantly less tax than someone earning the same amount in STCG. This difference highlights the importance of understanding the distinctions between various income types and their respective tax implications under the new regime.
The implications of these tax regulations extend far beyond simple calculations. The separate taxation of capital gains necessitates a strategic approach to investment planning. Taxpayers need to consider the tax implications of their investment choices, understanding that the allure of a completely tax-free income up to ₹12 lakh is conditional upon the nature of their earnings. For example, an individual aiming to maximize tax benefits might choose to shift their investment strategy to favor longer-term holdings to reduce their tax burden on capital gains. This situation underscores the need for greater financial literacy and access to expert advice, particularly for those investing in the stock market or mutual funds.
The complexities surrounding this new tax regime underscore the need for enhanced clarity and accessible information for taxpayers. While the government's intention may be to provide tax relief, the lack of clear communication about the nuances of income categorization and tax exemptions may inadvertently lead to confusion and unintended tax burdens. This could particularly affect those less familiar with financial regulations and tax laws, potentially widening existing financial inequality. The government needs to prioritize simpler explanations of tax laws and ensure wider dissemination of this information to the public.
The issue highlights a broader challenge: the need for the tax system to adapt to the evolving nature of income sources. As the Indian economy diversifies and individuals engage in a wider range of financial activities, the tax system must move beyond simplistic generalizations and embrace a more nuanced and adaptable approach to income taxation. This requires not only clearer communication but also a reassessment of tax brackets, exemptions, and the overall structure of the system to ensure fairness, clarity, and efficiency for all taxpayers. Further, educational initiatives and easily accessible resources on tax planning are crucial for empowering citizens to navigate the system effectively.
In conclusion, while Budget 2025's announcement of a tax-free income up to ₹12 lakh presents a significant boon for many salaried individuals, the caveat surrounding the separate taxation of capital gains significantly impacts the overall impact of the policy. The lack of explicit communication on this critical point has created confusion and necessitates a more transparent and inclusive approach to informing taxpayers about their tax liabilities. This situation highlights the critical need for a comprehensive review of the tax system, ensuring it remains equitable, easily understandable, and adaptive to the evolving financial landscape of India.
Source: Budget 2025: Salary up to ₹12 lakh won't be tax free under new regime in these cases