Good news for Indian people. In the Union Budget, Finance Minister Nirmala Sitharaman announced that annual income up to 12 lakhs will be entirely tax-free under the new tax regime. This topic is widely discussed, and if you have taken this information at face value, you might be misled. The reason is that Section 87A of the Income Tax Act, which allows for the tax exemption on income up to 12 lakhs, does not extend to income categorized as special rate income.
Income derived from sources such as lotteries or equity falls under this special rate category. Additionally, both short-term and long-term capital gains are included in this classification. Consequently, even if your total annual income is below 12 lakhs, any portion of that income originating from short-term or long-term capital gains will still be subject to taxation.
To illustrate this, consider a scenario where your annual income is Rs 8 lakh. If you earn Rs 3.5 lakh from lottery winnings in that year, your tax liability will not be zero. You will be required to pay tax at a rate of 10 percent on the Rs 3.5 lakh, resulting in a payment of Rs 35,000 to the Income Tax Department.
Similarly, taxes will apply to any short-term and long-term capital gains, even if your total income is under 12 lakhs. The tax calculations for these gains are governed by Section 111A and Section 112, respectively, and the provisions of Section 87A do not apply to them.
Get a grip on the 87-A rebate from the budget like this:
It’s crucial to grasp how the new tax system makes income up to 12 lakhs tax-free. According to Section 87-A of the Income Tax Act, there’s no tax on income up to four lakhs. For the income range of four to eight lakhs, a 5% tax kicks in, which can amount to a maximum of Rs 20,000. Then, for income between eight to twelve lakhs, the tax can reach up to 60 thousand at a 10% rate. This budget introduced a rebate of up to 60 thousand under 87-A.
So, income up to 12 lakhs can be tax-free, but keep in mind that this rebate doesn’t apply to short-term or long-term capital gains under 87-A. In those cases, you’ll still owe taxes even if your income is below 12 lakhs. Also, for those eligible for the rebate under 87-A, after filing your ITR to claim it, the rebate amount will be credited to your bank account.