Explained: Income tax on gains from shares and rebate under Section 87A

 







For the financial year 20-21 my total income, after various deductions including u/s 80C is ₹4,88,000/-. This includes capital gains on equity mutual funds: short term capital gains of Rs. 17,000/- and long term capital gains of Rs. 55,000/- after initial exemption of Rs. 1 lakh. Since my income does not exceed ₹5 lakh I am entitled to rebate available under Section 87A and I do not have to pay any tax. Is my understanding correct?

An individual taxpayer who is resident of India for income tax purposes is entitled to claim a rebate of up to Rs. 12,500/- under Section 87A, against his tax liability provided his total taxable income after various deductions exemptions does not exceed five lakhs rupees for the year. Many persons are under the impression that in case the net taxable income does not exceed five lakhs, one does not have to pay any tax irrespective of composition of the total income.

This understanding is not fully correct because the rebate available under Section 87A can be claimed against tax liability of any nature except for long term capital gains arising on equity shares sold on stock exchange and equity oriented mutual fund schemes. So though you are eligible to claim rebate under Section 87A, as your total income does not exceed the threshold of five lakh rupees, you still have to pay tax on long term capital gains on equity mutual funds. Please note the rebate under Section 87A is available against tax liability in respect of short term capital gains on equity products.

Though this an anomaly under the tax laws where the rebate is available against tax liability on short term capital gains but not against tax liability on long term capital gains of the same nature. It should be the other way round. So to conclude you will have to pay tax at flat rate of 10.40% (Tax at 10% and cess at 4% on tax) on the net taxable long term capital gains of Rs. 55,000/- on equity mutual fund schemes.


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