India’s widely circulated assertion that there will be “no tax up to Rs 12 lakh” under the new tax regime has been the subject of a social media post by a chartered accountant.
Understanding the Rs 12 Lakh Tax-Free Claim
The post highlights the fact that many individuals are unaware that capital gains are not eligible for the tax rebate.
The CA mentions a scenario in which a taxpayer having capital gains of Rs 1.10 lakh and salary income of Rs 10.75 lakh is nevertheless indicated to have a tax payment of approximately Rs 22,000, raising questions regarding the threshold’s operation.
Scenario Shared by Chartered Accountant
She posts on X, formerly Twitter: “My client earns Rs 10.75 lakh annually from her wages.” 1.10 lakh rupees is the capital gain. The amount of tax due is Rs 22,000. Please educate the public about proper treatment.
The main problem is that capital gains are usually subject to different rates of taxation, and the rebate that under the new regime makes income tax-free up to Rs 12 lakh usually does not apply to capital gains.
Capital Gains Taxation Explained
Profits from the sale of assets, including stocks, real estate, and gold, are known as capital gains. Depending on the type of capital asset, STCG is applicable when it is held for less than 12 to 24 months, and LTCG is applicable when it is held for more than 12 to 24 months.
For example, long-term capital gain assets on stocks have a one-year holding period and are subject to taxes of 12.5% and 20%, respectively. The property has a 24-month holding period.
💰 Rs 12 Lakh Tax-Free Threshold
- Income Type: Salary & Regular Income only
- Capital Gains: Not included in Section 87A rebate
- Section: 87A of Income Tax Act
- Effective Gross Income: Up to Rs 12.75 lakh (after Rs 75,000 standard deduction)
- Example: Salary Rs 10.75 lakh + Capital Gains Rs 1.10 lakh = Tax Rs 22,000
Section 87A Rebate and Its Limitations
Under the current regime, Section 87A of the Income Tax Act provides a rebate of up to Rs 60,000. This can result in zero tax for taxpayers under the new tax regime up to an income of Rs 12 lakh, or up to Rs 12.75 lakh gross after the normal deduction of Rs 75,000.
According to Rajarshi Dasgupta, Executive Director (Tax), Aquilaw, capital gains are normally not included by the Rs 12 lakh income tax exemption under Section 87A rebate under India’s new tax regime since they are subject to special rates rather than slab rates.
Dasgupta clarified that the refund only applies to ordinary income and stated, “This means that income from selling assets like stocks, property, or gold still receives tax even if your overall income is below the threshold.” Therefore, since this situation involves capital gains, the zero-tax benefit is not applicable.
Even the Union Budget 2025 made it clear that capital gains income is not eligible for Section 87A. “Under the new system, 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 like capital gains),” Finance Minister Nirmala Sitharam stated in her Budget 2025 speech on February 1, 2025.
⚠️ Capital Gains Tax Overview
- STCG: Short-term capital gains (assets < 12-24 months) taxed 15–20%
- LTCG: Long-term capital gains (assets > 12-24 months) taxed 10–20%
- Section 87A: Rebate not applicable to capital gains
- Exceptions: Section 54, Section 54EC for property reinvestment
- Impact: Tax cannot be lowered by the standard rebate
Frequently Asked Questions
1. Does the tax-free claim of Rs 12 lakh include capital gains?
No. Only regular income, such as salaries, company revenue, or pensions, is eligible for the Section 87A rebate. Excluded are capital gains, which are subject to specific rates of taxation.
2. What is Section 87A’s maximum rebate?
up to 60,000 rupees. As a result, under the new system, income up to Rs 12 lakh is essentially tax-free after regular deductions.
3. What taxes apply to capital gains?
Assets held for less than 12 to 24 months are subject to 15–20% tax, depending on the asset. LTCG (assets kept for more than 12 to 24 months): Depending on the asset, taxes range from 10 to 20%. This tax is not lowered by the refund.
4. What is the impact of standard deduction on the Rs 12 lakh threshold?
Salary income is subject to a standard deduction of Rs 75,000 under the new regime. Therefore, up to Rs 12.75 lakh can be the effective gross income for zero-tax eligibility.
5. Can taxpayers lower their capital gains taxes?
Yes, by means of exceptions such as: Sale of residential property for reinvestment in another property (Section 54) and Section 54EC (investment in designated bonds for real estate capital gains). However, these gains are not eligible for the Section 87A reimbursement.
Conclusion
Under the current tax system, the claim that there is “no tax up to Rs 12 lakh” only applies to normal income. The refund does not apply to capital gains, which are nevertheless subject to special rates of taxation. To avoid shocks, taxpayers need to be aware of this distinction and make appropriate plans for their investments or asset sales.
Disclaimer: This article is for informational purposes only and does not constitute professional tax advice. Readers should consult a qualified chartered accountant or tax professional before making any financial decisions.
