With the Union Budget 2026 just weeks away, taxpayers are revisited by the landmark announcements made in the previous budget. While the government brought massive relief by making annual income up to Rs 12 lakh tax-free under the new tax regime, many taxpayers are realizing that this “zero-tax” status comes with a significant catch.
If your income isn’t purely from a salary or business, you might still owe the tax department money. The distinction between “Normal Income” and “Special Rate Income” is the deciding factor in whether you pay zero tax or thousands.
The Budget 2025 Foundation
In the last Union Budget, the government restructured the New Tax Regime to put more disposable income into the hands of the middle class. The key highlights included:
- Zero Tax up to Rs 12 Lakh: Through tax rebates, individuals earning up to this limit pay no tax.
- Standard Deduction: For salaried employees, the effective tax-free limit is Rs 12.75 lakh (including the Rs 75,000 deduction).
- Simplified Slabs: A more gradual increase in tax rates across various income brackets.
The Catch: Normal Income vs. Special Rate Income
The Rs 12 lakh exemption is not a blanket waiver. It applies strictly to Normal Income, which includes Salary, Pension, and Business Income.
However, Special Rate Income—such as Long-Term Capital Gains (LTCG) from property or shares, and Short-Term Capital Gains (STCG) from securities—is taxed at fixed rates. Crucially, the tax rebate that makes the Rs 12 lakh bracket “tax-free” does not apply to these special gains in the same way.
New Income Tax Slabs (Current Structure)
| 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% |
Real-World Scenarios: Who Pays and Who Doesn’t?
To understand how your tax is calculated, look at these two different scenarios for a total income of Rs 12 lakh:
Scenario A: 100% Salaried Income (Zero Tax)
- Gross Salary: Rs 12,75,000
- Standard Deduction: Rs 75,000
- Taxable Income: Rs 12,00,000
- Result: Since the entire income is “Normal Income,” the slab benefits and government rebates apply fully. Total Tax: Zero.
Scenario B: Mixed Income with Capital Gains (Tax Payable)
- Salary Income: Rs 9,00,000
- Long-Term Capital Gains (LTCG): Rs 3,00,000
- Total Income: Rs 12,00,000
- Result: Even though the total is Rs 12 lakh, the Capital Gains are taxed at special rates. The rebate does not cover the tax due on the Rs 3 lakh gain. Total Tax: Tax is payable on the Capital Gains portion.
What to Expect from Budget 2026?
As expectations build for the upcoming budget, the focus remains on whether Finance Minister Nirmala Sitharaman will:
- Clarify Special Income Taxation: Will there be a push to include small capital gains within the rebate limit?
- Increase Deductions: Will the standard deduction be raised further to combat inflation?
- Further Slab Revision: Will the 10% or 15% brackets be widened to provide more relief?
Final Word:
Before you plan your finances for the next fiscal year, analyze your income breakup. The “Rs 12 lakh tax-free” headline is a boon for many, but for investors, it requires careful calculation to avoid surprises during tax filing.