The Union Budget 2025 brought massive relief to middle-class taxpayers by making annual income up to Rs 12 lakh tax-free under the new tax regime. However, this benefit comes with a key condition — it applies only to normal income and excludes special rate income such as capital gains. With Budget 2026 just weeks away, understanding who truly qualifies for this tax relief has become more important than ever.
Budget 2026: Your Rs 12 lakh annual income isn’t fully tax-free if it includes this component (AI-generated image)
The last Union Budget was one of the biggest in recent years when it came to income tax relief for middle-class taxpayers. Under the new tax regime, the government announced that there would be no income tax on annual income up to Rs 12 lakh, a move that brought huge relief to millions.
At first glance, the Rs 12 lakh tax-free announcement sounded like a blanket exemption for all taxpayers. However, there was an important fine print that many overlooked — this benefit applies only to normal income and does not extend to “special rate income” such as capital gains.
With Union Budget 2026 just weeks away, it becomes crucial for taxpayers to clearly understand what the Rs 12 lakh tax-free limit actually means, who qualifies for it, and who may still end up paying tax despite staying within this threshold.
What exactly did Budget 2025 announce?
-No income tax is payable on income up to Rs 12 lakh under the new tax regime
-For salaried taxpayers, the limit effectively rises to Rs 12.75 lakh due to a standard deduction of Rs 75,000
-This benefit applies only to normal income — such as salary, pension or business income
-Special rate income, like capital gains, does not qualify for this tax-free treatment
In short: Rs 12 lakh tax-free does not mean all types of income are exempt
New income tax slabs announced in Budget 2025
| Annual Income | Tax Rate |
| Up to ₹4 lakh | Nil |
| ₹4 – ₹8 lakh | 5% |
| ₹8 – ₹12 lakh | 10% |
| ₹12 – ₹16 lakh | 15% |
| ₹16 – ₹20 lakh | 20% |
| ₹20 – ₹24 lakh | 25% |
| Above ₹24 lakh | 30% |
Along with these slab changes, the government provided a tax rebate, ensuring that taxpayers with income up to ₹12 lakh end up paying zero tax, provided the income is not from special sources.
The key catch: What is ‘special rate income’?
Special rate income refers to income that is taxed at fixed rates, irrespective of slabs. This includes long-term capital gains (LTCG), short-term capital gains (STCG) and income from certain assets and securities.
Such income does not get the benefit of slab-based rebates, even if your total income is Rs 12 lakh or below.
Scenario 1: Entire Rs 12 lakh comes from salary — Zero tax
Example:
Salary income: Rs 12,75,000
Standard deduction: Rs 75,000
Taxable income: Rs 12,00,000
Since the entire income is salary income, the slab benefit and rebate apply fully.
Final tax payable: Zero
This is the scenario the Budget announcement was primarily referring to.
Scenario 2: Rs 12 lakh income includes capital gains — Tax becomes payable
Example:
Salary income: Rs 9,00,000
Long-term capital gains: Rs 3,00,000
Total income: Rs 12,00,000
Here’s the catch:
-Salary income benefits from slabs and rebate
-Capital gains are taxed separately at special rates
-The rebate does not apply to capital gains
-So even though total income is Rs 12 lakh, tax will still be payable on capital gains.
-This is where many taxpayers get surprised at the time of filing returns.
Why the government structured it this way
According to the government, the revised tax structure was designed to reduce tax burden on the middle class and leave more money for consumption, savings, and investment. It was also aimed at making the tax system simpler and more predictable and reducing disputes and litigation under the new tax regime.
Back then, Finance Minister Nirmala Sitharaman reiterated that the upcoming new income tax law will carry forward the spirit of “Nyaya”, focusing on clarity and fairness.
Summing up…
Taxpayers should remember before Budget 2026 that Rs 12 lakh tax-free does not mean all income is exempt as the benefit applies only to normal income and capital gains remain taxable, even if total income is Rs 12 lakh.
Understanding income break-up is crucial for tax planning
As expectations build ahead of Budget 2026, taxpayers will be keenly watching whether this structure is further simplified — or whether more clarity is provided around special income taxation.
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