Finance Minister Nirmala Sitharaman's Budget 2025 announcement regarding income tax rebates has created confusion among taxpayers, particularly about the inclusion of capital gains in the Rs 12 lakh exemption. The Central Board of Direct Taxes (CBDT) has now issued a clarification, stating that income taxed at special rates such as capital gains will be excluded when determining eligibility for the rebate under Section 87A.
What Does the CBDT Clarification Mean?
According to the 'Key Highlights of the Finance Bill, 2025,' resident individuals opting for the new tax regime under Section 115BAC will not count capital gains while calculating the Rs 12 lakh limit for the Section 87A rebate.
For instance, if a taxpayer earns Rs 13 lakh in a financial year, including Rs 1 lakh from capital gains, the capital gains portion will be excluded from the rebate calculation. This means the taxable income for rebate purposes would be Rs 12 lakh, making the taxpayer eligible for the exemption.
The new tax regime rebate is applicable only to annual incomes up to Rs 12 lakh. However, after including the standard deduction of Rs 75,000, salaried taxpayers can claim the rebate on an effective income of up to Rs 12.75 lakh.
Understanding Capital Gains and Their Taxation
Capital gains arise when an individual sells an asset at a higher price than its purchase value. These gains are categorized as:
- Short-Term Capital Gains (STCG): Arises when equity shares or equity mutual funds are sold within 12 months of purchase. STCG tax has been increased to 20% in Budget 2024.
- Long-Term Capital Gains (LTCG): Applicable when equity shares are held for more than 12 months. The LTCG tax rate was raised to 12.5% in Budget 2024, from the earlier 10%.
Additionally, LTCG up to Rs 1.25 lakh remains tax-exempt.
Income Tax Slabs for FY 2025-26 (New Regime)
The revised income tax slabs under the new tax regime for FY 2025-26 are:
- Up to Rs 4,00,000: No tax
- Rs 4,00,001 - Rs 8,00,000: 5%
- Rs 8,00,001 - Rs 12,00,000: 10%
- Rs 12,00,001 - Rs 16,00,000: 15%
- Rs 16,00,001 - Rs 20,00,000: 20%
- Rs 20,00,001 - Rs 24,00,000: 25%
- Above Rs 24,00,000: 30%
Key Takeaways for Taxpayers
- The Rs 12 lakh rebate under Section 87A is only available under the new tax regime.
- Capital gains are excluded when calculating eligibility for the rebate.
- Salaried individuals can avail the rebate for an income up to Rs 12.75 lakh, including the Rs 75,000 standard deduction.
- LTCG up to Rs 1.25 lakh remains tax-free, but STCG is now taxed at 20%.
With these clarifications from CBDT, taxpayers can better understand their income tax liability and plan their finances accordingly for FY 2025-26.
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