Salary Rs 12.45 Lakh but with Dividend, Interest, MF its Over 12.75 Lakh: Do I Need to Pay Tax?

Understanding the Enhanced No-Tax Rebate up to Rs 12 Lakh in the New Tax Regime for FY 2025-26

The New Tax Regime: Key Highlights and Rebate Structure

The Union Budget 2025-26 introduced a major relief for middle-class taxpayers by enhancing the rebate under Section 87A, effectively making income up to Rs 12 lakh tax-free under the new tax regime. For salaried individuals, this limit extends slightly to Rs 12.75 lakh considering the standard deduction of Rs 75,000. This means taxpayers with salary income up to Rs 12.75 lakh owe zero income tax in FY 2025-26 under the new regime.

The revised tax slabs under the new regime are as follows:

• Up to Rs 4 lakh: Nil tax
• Rs 4 lakh to Rs 8 lakh: 5%
• Rs 8 lakh to Rs 12 lakh: 10%
• Rs 12 lakh to Rs 16 lakh: 15%
• Rs 16 lakh to Rs 20 lakh: 20%
• Rs 20 lakh to Rs 24 lakh: 25%
• Above Rs 24 lakh: 30%

The tax rebate under Section 87A has been increased to Rs 60,000, ensuring a full rebate for incomes up to Rs 12 lakh (or Rs 12.75 lakh for salaried taxpayers after standard deduction).

How the Rebate Applies Only to Income Taxed at Normal Slab Rates

It is crucial to understand that the enhanced no-tax rebate applies exclusively to incomes taxed under normal slab rates, typically salary income or income from business or profession. This rebate is not available against income taxed at special rates or obligations, such as capital gains or income from dividends and interest.

This distinction means that while your salary income up to Rs 12.75 lakh (after standard deduction) might be eligible for full rebate, any additional income from dividends, interest, or mutual fund gains will be added to your taxable income and taxed at applicable slab rates without benefiting from the rebate threshold.

Impact of Dividends, Interest, and Mutual Fund Gains on Your Taxable Income

Income received from dividends, interest on savings or fixed deposits, and mutual fund gains generally fall under “Income from Other Sources” or capital gains and are taxed according to the individual’s slab rates. This income is aggregated with salary income to determine the total taxable income. Consequently, such income may push your total income beyond the Rs 12–12.75 lakh rebate ceiling, resulting in a tax liability.

Key points to consider include:

• Dividends: Since the abolition of the Dividend Distribution Tax (DDT) from FY 2020-21, dividends are taxed at the individual’s slab rate and subject to TDS if exceeding Rs 10,000 (raised recently from Rs 5,000).
• Interest Income: Taxed at slab rates, interest income adds to the total taxable income that tests the rebate limit.
• Mutual Fund Income: Dividend payouts from mutual funds are taxed as per income slabs and attract TDS above Rs 10,000. Capital gains have their specific tax regimes but still count towards total income.

For example, if your salary is Rs 12.45 lakh (within the rebate limit) but you receive Rs 30,000 as dividends, your total taxable income becomes Rs 12.75 lakh (or more), potentially pushing you beyond the no-tax threshold and attracting tax liability on the excess amount.

Planning Implications and Taxpayer Considerations

Taxpayers must consider all sources of income, including dividends, interest, and mutual fund returns, when evaluating their total taxable income under the new tax regime. The rebate up to Rs 12 lakh (or Rs 12.75 lakh for salaried individuals) only shields income taxed at slab rates, but once aggregated incomes cross this threshold, tax becomes payable.

Given the changes, it is advisable for individuals to:

• Calculate their total income including all sources, not just salary.
• Understand that dividends and interest may reduce the benefit of the enhanced rebate by pushing total income beyond Rs 12 lakh.
• Compare the new and old tax regimes, especially if they have significant non-salary income.
• Consider tax planning strategies to manage income streams to stay within rebate thresholds where possible.

In summary, while the enhanced no-tax rebate under the new regime is a boon for salaried individuals, dividend, interest, and mutual fund incomes can influence your tax liability by pushing total income beyond the rebate limit. Staying informed and planning accordingly is essential to optimize tax savings.