CLEARING ILLUSIONS ON COMPUTATION OF TAX REBATE

Jigar M. Patel
International Tax Attorney

Under the new tax regime, a resident individual taxpayer is entitled to a tax rebate of up to Rs.25,000 under Section 87A of the Income-tax Act, if his taxable income does not exceed Rs. 7 lakhs. In view of the above, the common understanding prevalent amongst taxpayers is that if their taxable income is less than Rs. 7 lakhs, tax payable by him is Zero!

This is in fact not true in all cases, as we shall analyze in the write-up below.

Tax on LTCG from Equity not entitled to Tax Rebate

Section 112A prescribes a special tax rate of 10% on Long Term Capital Gains earned by a taxpayer from equity shares & units of equity oriented mutual funds. However, it needs to be noted that the benefit of rebate u/s 87A is not available against the tax payable in respect of such LTCG from Equity.

Misconception in regard to Tax Exemption for LTCG from Equity

There is also a common misconception that long term equity gains up to Rs. 1 lakh are exempt and to be therefore excluded, while computing the total income of a taxpayer. Section 112A does not exempt any LTCG income, but clarifies that tax shall be payable on such LTCG in excess of Rs. 1 lakh. It would be interesting to consider various tax scenarios based on this tax proposition.

Scenario-1: Kothari’s income from other sources is Rs. 7 lakhs and he has long-term capital gain of Rs. 1 lakh from listed equity shares. Can he claim zero tax status in his case? As explained above, the Rs. 1 lakh LTCG would form part of the total income, which with the other income of Rs. 7 lakhs, would stand computed at Rs. 8 lakhs. No tax would be payable u/s. 112A on Rs. 1 lakh equity LTCG and the tax payable on other income of Rs. 7 lakhs would work out to Rs.25,000. However, in this case, Kothari would not be entitled to any Rebate u/s. 87A, as his total income including LTCG is Rs.8 lakhs (more than Rs, 7 lakhs).

Scenario-2: If Kothari’s income from other sources is Rs. 6 lakhs and LTCG on equity Rs. 1 lakh (total income at Rs. 7 lakhs), he would be entitled to both, the tax concession of Rs. 10,000 u/s. 112A, as well as full Rebate against tax payable of Rs. 15,000, effectively resulting in tax payable at Rs. NIL.

Scenario-3: Kothari’s total income is Rs. 7 lakhs, income from other sources being Rs. 5 lakhs and LTCG on equity of Rs. 2 lakhs. As can be seen from the chart below, he would end up paying tax of Rs. 10,000 on the equity gains, even after the tax relief of Rs. 10,000 u/s. 112A, since the benefit of tax rebate u/s. 87A would be restricted to the tax payable on other income and the same would not be available to him against the tax payable on equity gains.

Scenario-3: Computation of Tax & Eligible Rebate u/s. 87A