The Union Budget 2025-26 is being described as a "dream budget" with its significant income tax relaxations. The new budget exempts annual income up to Rs 12 lakh from tax. However, there’s a condition: this exemption comes with conditions that could make income up to Rs 12 lakh taxable. It’s important to dig deeper into the details for better tax planning.

In the Budget 2025, Finance Minister Nirmala Sitharaman announced that no income tax will be paid on earnings up to Rs 12 lakh per year (Rs 1 lakh per month), except for special types of income like capital gains. For salaried people, this limit increases to Rs 12.75 lakh because of a Rs 75,000 standard deduction.

The government has also updated the income tax slabs under the new system: Under the new tax regime, income up to Rs 4 lakh is tax-free. Income between Rs 4 lakh and Rs 8 lakh is taxed at 5%, between Rs 8 lakh and Rs 12 lakh at 10%, between Rs 12 lakh and Rs 16 lakh at 15%, between Rs 16 lakh and Rs 20 lakh at 20%, between Rs 20 lakh and Rs 24 lakh at 25%, and above Rs 24 lakh at 30%.

Under the new tax system, people with an annual income up to Rs 12 lakh will not have to pay any income tax, as long as it’s from regular sources like salary or business income. The government has also raised the basic exemption limit to Rs 4 lakh and increased the tax rebate under Section 87A to Rs 60,000, so the tax benefit is more generous.

However, if your income includes special sources like capital gains (money earned from selling assets like property or stocks), then that part of the income will not be tax-free. For example, if you make Rs 12 lakh in total, with Rs 10 lakh from salary (which will be tax-free) and Rs 2 lakh from selling stocks (capital gains), the Rs 2 lakh from capital gains will be taxed separately according to the rules for capital gains.

In India, special income like capital gains is taxed differently based on the holding period. For equity shares and equity-oriented mutual funds, if the asset is sold within 12 months, it is considered a short-term capital gain (STCG) and taxed at 20%. If the asset is held for 12 months or more, it is considered a long-term capital gain (LTCG) and taxed at 12.5%. Also, any long-term capital gains up to Rs 1.25 lakh are exempt from tax, but gains above that amount will be taxable.

Tax on special incomes varies by asset type and holding period. For debt mutual funds, STCG is taxed at slab rates for holdings under 24 months, and LTCG is taxed at 12.5% without indexation for holdings of 24 months or more. For real estate, STCG is taxed at slab rates for properties held under 24 months, and LTCG is taxed at 20% with indexation or 12.5% without indexation for properties acquired before July 23, 2024. For unlisted shares, STCG is taxed at slab rates for holdings under 24 months, and LTCG is taxed at 12.5% without indexation for holdings of 24 months or more.

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