A viewer on our YouTube channel asks, “I have a net taxable income of around 4.8L( excluding LTGC, after all the deductions) and LTGC( from Equity MF ) of 37k. So the problem I am facing is that whenever I am putting the LTGC amount in 112A then it is added back to my net income (4.8L+ 37K ) =5.27 Lac and I’m not getting the benefit of Rs. 12,500 rebate under section 87A and eventually taxed around 14k”. In this article, let us discuss this curious problem.
What is the 87A tax rebate? Income tax up to Rs. 2.5 lakhs is tax-free for those below 0 years of age. The 87A rebate allows us to reduce the tax on net total income* to zero provided the net total income is less than or equal to Rs. 5 lakhs.
* after 80C, 80D etc. deductions under the old tax regime or without these in the new tax regimen. We shall use the term “net total income” repeatedly below as it is key to this problem.
Let us consider a net total income of Rs. 4,80,000 without any equity LTCG. The tax to be paid is Rs. 9000 (before cess). The 87A rebate to be applied (before cess) is Rs. 9000. Therefore the tax to be paid is zero.
Now let us include to this Rs. 4,80,000 an equity LTCG of Rs. 20,000. So the net total income = Rs. 5,00,000. It is important to understand that the 87A rebate does not apply to any capital gains.
The tax before cess is still Rs. 9,000 as equity LTCG equal to or below Rs. one lakh is tax-free. The 87A rebate is Rs. 9000 and the tax payable is zero.
Now consider an equity LTCG of Rs. 21,000. The equity LTCG tax is still zero. However, the net total income is now Rs. 5,01,000 and now the ITR form refuses to include the 87A rebate. The tax payable now is Rs. 9000!
Consider another example: Suppose the income after 80C,80D etc. deductions is Rs. 3,90,000. The tax is Rs. 4500 (before cess). The 87A rebate is Rs. 4500. So the next tax payable is zero.
Now add equity LTCG of Rs. 1.1 Lakhs. The net total income is Rs. 5 Lakhs. The tax payable (before cess) is Rs. 4500 + Rs. 1000 (10% of Rs. 10,000 equity LTCG. The first one lakh is tax-free). The 87A rebate is Rs. 4500 and the net tax payable is Rs. 1000. the rebate does not apply to the tax on capital gains.
What is the problem here? The IT dept includes equity LTCG to the net total income without accounting for the Rs. 1 lakh tax-free limit. Therefore if the net total income is above Rs. 5 lakh even if it is because of tax-free LTCG, the 87A rebate is not being applied. Another situation has been described here: No applicability of section 14A on LTCG exemption of Rs.1 Lakh.
This seems unfair in our opinion. Including a tax-free income to the total income does not make sense and even if done it should not increase the tax! The IT dept. should fix this inconsistency by only including the taxable portion of equity LTCG (beyond the first 1 Lakh) to the net total income before the 87A rebate is applied.
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Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over nine years of experience publishing news analysis, research and financial product development. Connect with him via Twitter or Linkedin or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation for promoting unbiased, commission-free investment advice.
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