The Income Tax Act 2025 introduces significant changes for FY 2026-27, with the ₹12 lakh tax-free limit requiring careful understanding - the Section 87A rebate does not apply to capital gains income. If capital gains push total income above ₹12 lakh, the rebate is lost on all income. Marginal relief prevents the ₹12 lakh cliff - for income of ₹12,10,000, tax is limited to ₹10,000 (the excess over ₹12 lakh) rather than the full computed tax of ₹61,500. The ITR-3 and ITR-4 filing deadline has been extended to August 31 from Tax Year 2026-27, providing freelancers, consultants, and small business owners with a full extra calendar month to finalise their books. As per the latest clarifications, the rebate under Section 87A is not applicable to Long-Term Capital Gains (LTCG) taxed under Section 112A, making it crucial for investors to understand the distinction between regular income and capital gains taxation.
Dividend income is taxed at slab rates under Income from Other Sources, with companies deducting TDS at 10% if dividend income exceeds ₹5,000 annually. As per CA Abhishek Soni, CEO & Co-founder of Tax2win, higher-income taxpayers usually pay more tax on dividends due to their higher slab rates. Bonus shares are issued free of cost to existing shareholders and are not taxed at the time of allotment, but when sold, capital gains tax applies based on holding period. If sold within 1 year, Short-Term Capital Gains (STCG) are taxed at 20%, while holding for more than 1 year results in Long-Term Capital Gains (LTCG) taxed at 12.5% above ₹1.25 lakh. Buyback taxation has undergone significant changes - before October 2024, companies paid 20-23% tax while investors received money tax-free, but after October 2024, the tax shifted to investors as dividend income at slab rates. From April 2026 onwards, buybacks will be taxed again under capital gains rules, depending on holding period, with retail investors holding shares for more than 12 months paying LTCG at 12.5% above ₹1.25 lakh annual exemption.
According to reports from ABP Live, debt mutual funds are divided into two categories based on investment timing. Investments made after April 1, 2023 are always treated as short-term capital gains, regardless of holding period. These gains are added to your income and taxed as per your applicable slab rate. Older investments follow different rules, with gains from investments purchased before April 1, 2023 and held for over two years treated as long-term capital gains. For example, ₹3.20 lakh in gains from the ABSL Corporate Bond Fund would be taxed at a flat rate of 12.50%, resulting in a tax of ₹40,000. The capital gains framework remains largely stable with LTCG on listed equity at 12.5%, STCG at 20%, and the ₹1.25 lakh annual exemption unchanged. However, TDS provisions are not applicable so far on LTCG on equities for resident taxpayers, while TDS at the rate of 10% or 12.5% as applicable has to be deducted in case of LTCG payment to non-residents, with an additional 4% cess.
As reported by ABP Live, equity gains are treated separately with significant tax exemptions. Long-term capital gains from equity investments up to ₹1.25 lakh are tax-free, so ₹1.20 lakh attracts no tax. Short-term gains are taxed at 20%, leading to a tax of ₹600 on ₹30,000 in gains. This tax-free threshold provides substantial relief for equity investors compared to other investment categories. The ₹1.25 lakh annual exemption for LTCG on listed equities and equity mutual funds continues without change, with the tax harvesting strategy of realising ₹1.25 lakh in LTCG each year before March 31 remaining fully valid for Tax Year 2026-27. The benefit of inflation indexation of the cost of acquisition will not be available for calculating LTCG on equity shares or equity-oriented funds, as clarified by the income tax department.
The most significant change affects share buyback taxation from April 1, 2026, where all share buyback proceeds are now taxed as capital gains - not deemed dividends. Retail investors holding shares for more than 12 months pay LTCG at 12.5% above ₹1.25 lakh annual LTCG exemption - a massive reduction from the earlier slab-rate treatment. Shares held under 12 months attract STCG at 20% - still lower than the previous 35.88% for high-income taxpayers. Individual promoters face an effective tax rate of approximately 30% on buyback gains, while corporate promoters face approximately 22%. This change provides retail investors with 65% tax savings compared to the old deemed-dividend treatment, making it arguably the most investor-friendly substantive change in Budget 2026. Surcharge is capped at the rate of 15% on dividend and capital gains under Sections 111A, 112A & 112, providing some relief to high-income taxpayers.
A significant change affects Sovereign Gold Bond holders where secondary market SGB buyers lose maturity exemption from April 2026. If you bought SGBs from stock exchanges or OTC (secondary market), maturity redemption gains are now taxed as capital gains - LTCG at 20% with indexation since most SGB holdings exceed 36 months. Primary issue SGB holders retain full maturity exemption - no change for them. Primary issue SGB holders: still exempt - no change for them. For investors who planned for zero tax on secondary market SGBs, the maturity capital gains tax now materially changes the net return calculation, though it remains lower than the 30% slab-rate treatment they feared.
