The Union Budget 2025-26 is being touted as a “dream budget” due to its income tax relaxations.
The budget has exempted annual income up to Rs 12 lakh from income tax. However, it comes with a caveat that makes even income up to Rs 12 lakh taxable. So, it is necessary to know the fine print for better tax planning.
FM Nirmala Sitharaman’s Announcement in Budget 2025
Finance Minister Nirmala Sitharaman during her Budget 2025 announced, “There will be no income tax payable up to income of Rs 12 lakh (i.e. average income of Rs 1 lakh per month other than special rate income such as capital gains) under the new regime. This limit will be Rs 12.75 lakh for salaried taxpayers, due to a standard deduction of Rs 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%.
It means the basic exemption limit has been raised to Rs 4 lakh from the previous Rs 3 lakh under the new tax regime. Furthermore, the tax rebate under Section 87A has been increased to Rs 60,000, ensuring that individuals with a net taxable income up to Rs 12 lakh will not have to pay any tax.
When Your Income Below Rs 12 Lakh Becomes Taxable…
In the Budget Speech, FM Sitharaman specifically mentioned that the Rs 12 lakh income should not include “special rate income such as capital gains”. So, for instance, if a person earns Rs 12 lakh in a year (including Rs 10 lakh as salary income and Rs 2 lakh as a capital gain), his or her Rs 10 lakh salary income will be tax-free but the Rs 2 lakh special capital gain will attract 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:
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.
Is It Necessary To File ITR If Your Income Is BELOW Rs 12 Lakh?
Yes, even if your annual income is Rs 12 lakh and you have no tax liability due to the rebates and revised tax slabs introduced in the Union Budget 2025-26, you are still required to file an Income Tax Return (ITR). According to the Income Tax Department’s regulations, individuals whose gross total income exceeds the basic exemption limit of ₹4 lakh must file an ITR, regardless of whether their final tax liability is nil. It is a legal obligation.