The Union Budget 2025 has ushered in significant changes to India's income tax structure, notably increasing the tax-free income threshold to ₹12 lakh under the new tax regime. For salaried individuals, considering the standard deduction of ₹75,000, this effectively raises the non-taxable income limit to ₹12.75 lakh.

While this development substantially relieves many taxpayers, it's crucial to understand that not all income types benefit equally from this exemption. Specifically, capital gains are subject to distinct tax treatments that could result in unexpected tax liabilities, even if your total income is below ₹12 lakh.

Understanding the tax-free threshold
Under the revised tax slabs, the government has provided significant relief to individual taxpayers:

  • Income up to ₹4 lakh: No tax
  • ₹4 lakh to ₹8 lakh: 5%
  • ₹8 lakh to ₹12 lakh: 10%
  • ₹12 lakh to ₹16 lakh: 15%
  • ₹16 lakh to ₹20 lakh: 20%
  • ₹20 lakh to ₹24 lakh: 25%
  • Above ₹24 lakh: 30%

The standard deduction for salaried individuals has also been increased to ₹75,000. This means that a salaried person earning up to ₹12.75 lakh annually would not incur any tax liability under the new regime. However, it's essential to recognise that this tax-free benefit primarily applies to income taxed under the standard slab rates. 

Capital gains conundrum
Capital gains, profits earned from the sale of assets such as property, stocks, or mutual funds, are taxed differently from regular income. They are categorised into short-term and long-term capital gains, each with its own tax rates and holding period criteria.

Short-Term Capital Gains (STCG): For assets held for a short duration (typically less than 12 months for equities and 24 months for other assets), the gains are considered short-term. STCG on listed equity shares and equity-oriented mutual funds, where Securities Transaction Tax (STT) is applicable, is taxed at 20 per cent. For other assets, STCG is added to your total income and taxed as per the applicable slab rates.

Long-Term Capital Gains (LTCG): For assets held beyond the specified short-term period, the gains are classified as long-term. LTCG on listed equity shares and equity-oriented mutual funds exceeding ₹1.25 lakh is taxed at 12.5% without the benefit of indexation. 

For instance, if you have an LTCG of ₹2 lakh from equity investments, ₹75,000 would be taxable at 12.5%, resulting in a tax liability of ₹9,375. This tax applies irrespective of whether your total income is below ₹12 lakh.

Importance of comprehensive tax planning
The enhanced tax-free income threshold is undoubtedly beneficial for many taxpayers. However, recognising that this benefit does not extend to income taxed at special rates, such as capital gains, is imperative. Failing to account for these provisions can lead to unexpected tax liabilities during filing.

In conclusion, while the Budget 2025 offers substantial tax relief through the increased tax-free income limit, it's essential to remain vigilant about capital gains taxation. Proper understanding and planning can prevent unpleasant surprises during tax season and ensure compliance with tax regulations.
(The writer is a chartered accountant)

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