- Salaried individuals earning up to Rs 12 lakh pay no tax after standard deductions
- Long term capital gains above Rs 1.25 lakh are taxed at 12.5%
- Salary income within Rs 12 lakh may have zero tax, but capital gains can trigger a tax liability
The Centre's promise of zero tax for incomes up to Rs 12 lakh under the new tax regime comes with fine print that could unexpectedly catch equity investors. Even a modest amount of long term capital gains can trigger a tax bill, despite salary income staying within the zero tax bracket.
Explaining the mechanics, Deepika Mathur, Executive Director at Deloitte India, told NDTV that a salaried individual earning up to Rs 12.75 lakh can still pay no tax under the new regime. "After the standard deduction of Rs 75,000, taxable income comes down to Rs 12 lakh. The tax on this works out to Rs 60,000 plus cess, which is fully offset by the rebate under Section 87A," she said.
The exemption, however, does not extend to long term capital gains from equities. "The rebate under Section 87A is not applicable to long term capital gains taxable under Section 112A," Mathur said, adding that such gains are taxed at 12.5 percent on amounts exceeding Rs 1.25 lakh.
She illustrated the difference with examples. "If total income is Rs 11 lakh comprising Rs 9.75 lakh of salary and Rs 1.25 lakh of long term capital gains, there would still be no tax payable, as the gains do not exceed the exemption limit," Mathur said. "But if long term capital gains rise to Rs 3 lakh and salary income is Rs 8 lakh, tax would be payable on Rs 1.75 lakh at 12.5 percent."
In contrast, a salaried individual earning the same total income without any equity gains would continue to have a nil tax liability.
The structure has prompted questions on whether the middle class is being penalised for investing in equities. Mathur said the perception needs nuance. "Under the new tax regime, there are very limited deductions for savings instruments other than the employer's contribution to the National Pension Scheme," she told NDTV. "So there is no direct disadvantage if savings are not routed into traditional instruments."
She pointed out that capital gains tax rates on equities remain unchanged across both tax regimes. "The key difference is the non availability of the Section 87A rebate to the extent of capital gains income," Mathur said.
Drawing a comparison, she noted that interest income from fixed deposits does qualify for the rebate if total income stays within Rs 12 lakh, but the same relief does not apply to long term equity gains. Even so, she argued that equities are not taxed harshly. "Equity oriented long term capital gains are taxable only beyond Rs 1.25 lakh and at a special rate of 12.5 percent. Given this preferential structure, it would not be accurate to say the middle class is being penalised for investing in equities," Mathur said.
