Tax Rules You Need to Know: Paying Tax Even on Income Below Rs 12 Lakh

Finance Minister Nirmala Sitharaman’s announcement in the Union Budget to make annual income up to Rs 12 lakh tax-free under the new tax regime has led to widespread discussions. However, it’s important to understand that this benefit does not apply to all sources of income. If you have income from special categories like capital gains, you may still be liable to pay tax, even if your total income is under Rs 12 lakh.

Tax on Capital Gains

Even if your total earnings are under Rs 12 lakh, taxes may still be applicable if part of your income is derived from short-term or long-term capital gains. Certain types of income, such as lottery winnings, equity, and capital gains, fall under the category of special rate income and are not eligible for the tax rebate under Section 87A.

Special Rate Income Excluded from Rebate

Section 87A allows for a rebate on income up to Rs 12 lakh, making it appear that no tax is due on such income. However, this rebate does not apply to special rate income, which includes capital gains. As a result, even if your total income is less than Rs 12 lakh, if part of it comes from short-term or long-term capital gains, you will be required to pay tax.

Example:

Let’s understand this with an example:

• Suppose your total income is Rs 8 lakh.
• You earn Rs 3.5 lakh from lottery winnings.

In this scenario, despite your total income being less than Rs 12 lakh, you will still be required to pay 10% tax on the Rs 3.5 lakh from lottery earnings, which amounts to Rs 35,000.

Similarly, any short-term or long-term capital gains will be taxed, even if your total income is under Rs 12 lakh.

Details on Section 87A Rebate:

Under the new tax regime, income up to Rs 4 lakh is tax-free. If your income falls between Rs 4 lakh and Rs 8 lakh, you will be taxed at a rate of 5%, up to Rs 20,000. Income between Rs 8 lakh and Rs 12 lakh will be taxed at 10%, which could result in a tax of up to Rs 60,000.

However, the Section 87A rebate allows for a maximum rebate of Rs 60,000 on tax for income up to Rs 12 lakh. Still, it’s crucial to note that this rebate does not apply to short-term or long-term capital gains, so these earnings will be taxed separately.

Key Takeaways:

• Even if your total income is below Rs 12 lakh, you will still need to pay taxes on special rate income, such as capital gains.
• Section 87A’s rebate applies only to regular income and does not cover special rate income like capital gains.

Therefore, when planning for tax savings, make sure to account for any special rate income that might attract tax, regardless of your overall earnings.