Capital Gains Tax: Below the Exemption or 12 Lakh rebate Limit?

Decoding Capital Gains Tax: Do You Pay Even Below the Exemption Limit? Investing can be a rewarding journey, offering opportunities to grow ...

Decoding Capital Gains Tax: Do You Pay Even Below the Exemption Limit?

Investing can be a rewarding journey, offering opportunities to grow your wealth over time. However, navigating the tax implications of the profits you earn from these investments is a crucial aspect of financial literacy. When you sell an investment for a higher price than what you initially paid, the resulting profit is termed a capital gain, and this gain might be subject to taxation. A common concern for many investors, particularly those whose overall income is relatively modest, is whether they are obligated to pay capital gains tax if their total income, including these investment profits, falls below the standard income tax exemption threshold.

This blog post aims to clarify the regulations surrounding capital gains tax in India for the financial year 2025-26 (assessment year 2026-27). We will delve into whether individuals might still owe tax on their investment profits even if their total income appears to be below the taxable limit. Our discussion will cover both short-term and long-term capital gains, and we will also explore the role of the new ₹12 lakh rebate in this context.

Understanding Basic Income Tax Exemption Limits (FY 2025-26)

Before we delve into the specifics of capital gains, it's essential to have a clear understanding of the basic income tax exemption limits that are currently in place in India. These limits represent the income levels up to which individuals are not required to pay any income tax. It's important to note that India operates under two distinct tax regimes: the existing (often referred to as the old) tax regime and the new tax regime. The basic exemption limits vary depending on which regime a taxpayer chooses to follow.

Old Tax Regime

Under the old tax regime, the basic exemption limit is not uniform for all individuals but is instead determined by the taxpayer's age.

• Below 60 years: ₹2.5 lakh

• 60-79 years (Senior Citizens): ₹3 lakh

• 80 years and above (Super Senior Citizens): ₹5 lakh

New Tax Regime

In contrast, the new tax regime, for the financial year 2025-26, offers a simplified approach to the basic exemption limit. Under this regime, the exemption limit has been increased to ₹4 lakh for all individuals, irrespective of their age.

The following table summarizes the basic income tax exemption limits for the financial year 2025-26 under both the old and new tax regimes:

Tax Regime	Age Group	Exemption Limit (₹)
Old	Below 60 years	2,50,000
Old	60-79 years	3,00,000
Old	80 years and above	5,00,000
New	All age groups	4,00,000

Decoding Capital Gains: Short-Term vs. Long-Term

To understand whether capital gains tax is applicable when income is below these limits, we first need to define what capital gains are and differentiate between their types. Capital gains are essentially the profits that an investor earns from the sale or transfer of what are known as 'capital assets'. These assets can encompass a wide range of investments, including shares of stock, mutual funds, real estate properties, gold, and other valuable items.

For tax purposes, capital gains are broadly classified into two categories: short-term capital gains (STCG) and long-term capital gains (LTCG). This classification depends on how long the investor held the asset before selling it.

Short-Term Capital Gains (STCG)

Short-term capital gains arise when a capital asset is held for a relatively brief period before being sold at a profit. The holding period varies by asset type:

• Most Financial Assets (Shares, Equity-Oriented Mutual Funds): Up to 12 months

• Immovable Property (Land, Buildings): Up to 24 months

The tax rates for STCG depend on the asset sold:

• Listed Equity Shares/Equity MF (with STT): 20% flat rate

• Other Assets (Property, Gold, Unlisted Shares): Taxed according to the individual's income tax slab rates

The following table summarizes the short-term capital gains tax rates for the financial year 2025-26:

Asset Type	Holding Period	Applicable Tax Rate
Listed Equity Shares/Equity MF (with STT)	Up to 12 months	20%
Other Assets (Property, Gold, Unlisted Shares)	As applicable	According to income tax slabs

Long-Term Capital Gains (LTCG)

Long-term capital gains are generated from the sale of capital assets held for a more extended period:

• Shares and Equity-Oriented Mutual Funds: Over 12 months

• Immovable Property: Over 24 months

The tax implications for LTCG are as follows:

• Listed Equity Shares/Equity MF (with STT): 12.5% on gains exceeding ₹1.25 lakh in a financial year. Gains up to ₹1.25 lakh are exempt.

• Other Assets (Property, Gold, Unlisted Shares): 12.5% without indexation for transfers on or after July 23, 2024. For land and buildings acquired before this date, individuals and HUFs can choose between 12.5% without indexation or 20% with indexation.

The following table provides a summary of the long-term capital gains tax rates for the financial year 2025-26:

Asset Type	Holding Period	Exemption Limit (₹)	Applicable Tax Rate
Listed Equity Shares/Equity MF (with STT)	Over 12 months	1,25,000	12.5% (on gains above limit)
Other Assets (Property, Gold, Unlisted Shares)	As applicable	None	12.5% (without indexation)

Capital Gains Tax and the Basic Exemption Limit

Now, let's address the central question: Do you need to pay capital gains tax if your total income, including capital gains, is below the basic exemption limit?

• Resident individuals and Hindu Undivided Families (HUFs) can adjust any unutilized portion of their basic income tax exemption limit against their capital gains after accounting for other income.

• This benefit is not available to non-resident individuals, especially for long-term capital gains.

Example: A resident individual (below 60 years) has ₹2 lakh as short-term capital gains (other than equity shares/equity MF) and no other income. Under the New regime (exemption limit ₹4 lakh), no tax is payable as the gain is within the limit. If the gain was ₹4.5 lakh, tax would be applicable on ₹50,000 as per 4-8 lakh income tax slab.

The ₹12 Lakh Rebate and Capital Gains Tax (New Tax Regime)

The Union Budget 2025 has increased the tax rebate under Section 87A in the new tax regime to ₹60,000 for resident individuals with a total income of up to ₹12 lakh, effectively making income up to this amount tax-free.

However, this enhanced rebate does not apply to income taxed at special rates, which includes:

• Short-term capital gains taxed under Section 111A (from listed equity shares and equity-oriented mutual funds where STT is paid).

• Long-term capital gains taxed under Sections 112 and 112A (covering various long-term capital assets including equity shares and equity-oriented mutual funds).

Therefore, even if total income is below ₹12 lakh, tax on these capital gains might still be applicable.

Scenarios Illustrating Capital Gains Tax and the ₹12 Lakh Rebate

Let's consider some specific scenarios under the new tax regime for FY 2025-26:

Scenario 1: ₹12 Lakh Long-Term Capital Gains

• Individual's only income is ₹12 lakh from long-term capital gains on equity shares (after the ₹1.25 lakh exemption).

• Tax will likely be payable on the taxable portion of these gains at 12.5%, as the ₹12 lakh rebate under Section 87A does not apply to such income.

Scenario 2: ₹10 Lakh Salary and ₹3 Lakh Long-Term Capital Gains

• Salary income: ₹10 lakh (Taxable income after ₹75,000 standard deduction: ₹9.25 lakh)1

• Long-term capital gain from mutual fund units: ₹3 lakh(after exemption 1.25 Lakh net 1.75 Lakh)

• As the Total taxable income is 9.25 lakh plus 1.75 lakh=11 i.e, less than 12 lakh, Rebate 87A is applicable.

• Tax on salary income as per the new tax regime:

• Up to ₹4 lakh: Nil

• ₹4 lakh to ₹8 lakh: 5% of ₹4 lakh = ₹20,000

• ₹8 lakh to ₹9.25 lakh: 10% of ₹1.25 lakh = ₹12,500

• Total tax on salary: ₹32,500

• Rebate under Section 87A: ₹32,500 (equal to tax on salary income)

• Taxable salary income after rebate: Nil

• Long-term capital gain: The Taxable amount is ₹1.75 lakh (₹3 lakh - ₹1.25 lakh exemption).

• Tax on LTCG at 12.5%: ₹21,875.

• Education cess (4%): ₹875.

• Total Tax Liability: ₹22,750.

Particulars	Amount (₹)
Salary Income	10,00,000
Standard Deduction	(75,000)
Taxable Salary Income	9,25,000
Tax on Salary Income	32,500
Rebate on Salary Income u/s 87A	(32,500)
Taxable Salary Income After Rebate	0
Long-Term Capital Gain	3,00,000
Exemption on LTCG	(1,25,000)
Taxable LTCG	1,75,000
Tax on LTCG (12.5%)	21,875
Education Cess (4% on Tax)	875
Total Tax Liability	22,750

Scenario 3: ₹10 Lakh Salary and ₹3 Lakh Short-Term Capital Gains

• Salary income: ₹10 lakh (Taxable income after ₹75,000 standard deduction: ₹9.25 lakh)1

• Short-term capital gain from equity shares (with STT): ₹3 lakh

• As the Total taxable income is 9.25 lakh plus 3.00 lakh=12.25 lakh i.e, more than 12 lakh, Rebate 87A is not applicable.

• Tax on salary income as per new tax regime:

• Up to ₹4 lakh: Nil

• ₹4 lakh to ₹8 lakh: 5% of ₹4 lakh = ₹20,000

• ₹8 lakh to ₹9.25 lakh: 10% of ₹1.25 lakh = ₹12,500

• Total tax on salary: ₹32,500

• Rebate under Section 87A: Nil (as total income of ₹12.25 lakh exceeds ₹12 lakh threshold)

• Taxable salary income: ₹9.25 lakh

• Short-term capital gain: Taxable at a flat rate of 20%.

• Tax on STCG (20%): ₹60,000.

• Total tax (Salary + STCG): ₹32,500 + ₹60,000 = ₹92,500

• Education cess (4%): 4% of ₹92,500 = ₹3,700.

• Total Tax Liability: ₹96,200.

Particulars	Amount (₹)
Salary Income	10,00,000
Standard Deduction	(75,000)
Taxable Salary Income	9,25,000
Tax on Salary Income	32,500
Rebate on Salary Income u/s 87A	0
Short-Term Capital Gain	3,00,000
Tax on STCG (20%)	60,000
Total Tax	92,500
Education Cess (4% on Tax)	3,700
Total Tax Liability	96,200

Key Takeaways

In conclusion, it's important to understand the interplay between capital gains tax and the basic exemption limit, especially with the introduction of the enhanced ₹12 lakh rebate under the new tax regime for FY 2025-26. While this new rebate offers significant tax relief, its applicability to capital gains is restricted.

Resident individuals and HUFs have the provision to adjust any unutilized basic exemption limit against their capital gains after it has been first set off against other income. This can provide some relief if the total income, excluding capital gains, falls below the exemption threshold.

However, the ₹12 lakh rebate under Section 87A of the Income Tax Act, a key highlight of the new tax regime, does not extend to income that is taxed at special rates. This exclusion specifically includes short-term capital gains from equity and long-term capital gains, meaning that even if an individual's total income is below ₹12 lakh, they will likely still be required to pay tax on these types of capital gains. The tax rates applicable to these gains depend on their classification as short-term or long-term and the nature of the capital asset.

Therefore, taxpayers need to be mindful of these distinctions. While the increased rebate is beneficial for regular income, it does not provide an exemption for capital gains income that is taxed at special rates. For accurate tax planning and compliance, it is always recommended to consult with a qualified tax advisor who can provide guidance based on your specific financial situation.