The highlight of Finance Minister Nirmala Sitharaman’s budget presentation was giving Income tax relief for the middle class.
In this budget, they have introduced major changes to rates and slabs under the new tax regime.
Individuals With Rs 12 lakh Income Not To Pay Any Tax
Under this biggest announcement, the finance minister said that individuals earning up to Rs 12 lakh would not have to pay any tax.
The question here is that is this applicable if you have additional income from capital gains?
Further, Nirmala Sitharaman made it clear that “special rate income” such as capital gains will be taxed separately from salaried income, in her budget speech.
Further adding, “To taxpayers, up to Rs 12 lakh of normal income (other than special rate income such as capital gains) tax rebate is being provided in addition to the benefit due to slab rate reduction in such a manner that there is no tax payable by them.”
In simple words, salaried income up to Rs 12 lakh will be tax-free.
But, individuals will be taxed for long-term capital gains (LTCG) and short-term capital gains (STCG) and they are not eligible for rebate.
According to the Partner, Singhania & Co., Ritika Nayyar, “Your salary up to Rs 12 lakh is effectively tax-free only if your normal income (i.e. excluding incomes chargeable at special rates, example capital gains etc.) does not exceed Rs 12 lakh for the accounting year. In case your salary has short-term capital gains, you shall have to pay tax on that part of the income at special prescribed rates.”
Further, the new tax regime, no rebate is available if “total income” exceeds Rs 12 lakh, said Sumeet Agarwal, Associate Partner at Economic Laws Practice.
Adding, “Therefore, income from a salary of Rs. 12 lakh will not be tax-free if there is additional STCG income over and above the salary of Rs. 12 lakh.”
He stated, “Further, where the total income does not exceed Rs 12 lakh (including capital gains income taxable at special rates), such capital gains shall remain subject to tax while the balance income would be tax-free on account of rebate under the new tax regime.”
How Does It Work?
This can be understood with this example where a person earns Rs 12 lakh from salary and an additional Rs 2 lakh as STCG from equity investments, the total income would be Rs 14 lakh.
Here you can witness that the total income exceeds the Rs 12 lakh rebate threshold, the person will not be eligible for the Section 87A rebate.
In this example, Rs 12 lakh salary component will be taxed as per the slab rates.
Similarly, the Rs 2 lakh STCG will be taxed at 15%.
Consider the other scenario where if the person’s total income, including capital gains, remains within Rs 12 lakh.
In this case, only the capital gains portion will be taxed separately and the rest of the income will remain tax-free due to the rebate.
