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The Union Budget 2025-26 in India has introduced significant changes to the income tax system, creating a wave of optimism among taxpayers. The headline announcement, an income tax exemption for individuals earning up to ₹12 lakh annually, has been widely lauded as a positive step. However, a closer examination of the fine print reveals a crucial caveat: this exemption applies only to salary income and excludes what the Finance Minister termed 'special rate income,' most notably capital gains. This distinction is critical for understanding the actual implications of the new tax regime and highlights the need for careful tax planning. The seemingly straightforward ₹12 lakh threshold can become significantly more complex when additional income streams are considered.
The budget speech explicitly stated that the ₹12 lakh limit does not encompass capital gains from investments such as stocks, mutual funds, or real estate. This means that even if an individual's salary income falls below the ₹12 lakh threshold, any capital gains earned will be subject to separate taxation based on the asset type and holding period. For example, a salaried individual earning ₹10 lakh and realizing a ₹2 lakh capital gain will still be liable for tax on the ₹2 lakh capital gain, even though their salary income is tax-exempt under the new regime. This necessitates a thorough understanding of the various capital gains tax rates applicable to different asset classes.
The complexity is further amplified by the different tax rates and holding periods associated with various investment types. Short-term and long-term capital gains are taxed differently, varying depending on whether the assets are listed equity shares, debt-oriented mutual funds, immovable property (real estate), or unlisted shares. For instance, short-term capital gains from listed equity shares are taxed at 20%, while long-term capital gains (holding period of 12 months or more) are taxed at 12.5%, with a ₹1.25 lakh exemption. The taxation of capital gains from debt-oriented mutual funds and immovable property also presents its own set of rules, often involving different tax rates based on the acquisition date and holding period. The nuances involved require professional tax advice for many individuals to properly account for all potential tax implications.
The introduction of a higher basic exemption limit (₹4 lakh) and an increased tax rebate under Section 87A (₹60,000) are intended to further alleviate the tax burden for those earning below ₹12 lakh. However, these measures only apply to regular income and not to capital gains, underscoring the importance of recognizing the separation between salary income and investment income for tax purposes. Failing to consider this distinction could lead to significant tax underpayment or even penalties for non-compliance.
Despite the possibility of having a zero tax liability due to the combination of the higher exemption limit and rebate, Indian tax regulations mandate that individuals whose gross total income surpasses the basic exemption limit of ₹4 lakh must file an Income Tax Return (ITR). This obligation applies regardless of whether the final tax payable is zero. Therefore, even if an individual's salary and capital gains, when considered together, fall within the ₹12 lakh threshold resulting in no tax liability, they are still legally required to file their ITR. Non-compliance can result in penalties and other legal repercussions. This underscores the importance of staying informed about tax laws and ensuring compliance, even in situations where no tax is ultimately owed.
In conclusion, while the Union Budget 2025-26 has presented an apparent simplification of the income tax structure by raising the tax exemption limit to ₹12 lakh, the reality is more nuanced. The exclusion of capital gains from this exemption necessitates a more thorough understanding of tax laws and the specific tax implications of various investment strategies. Taxpayers must carefully analyze their income streams, accounting for both salary income and capital gains, to accurately determine their tax liability and ensure compliance with ITR filing requirements. Ignoring the distinction between different income sources can lead to unexpected tax consequences. Therefore, seeking professional tax advice is highly recommended for navigating this more complex landscape and optimizing tax planning.
Source: Your Income Below Rs 12 Lakh Will Be Taxed, Too, If...