Budget 2024: Is tax on long-term capital gains fair, even if individual is in nil bracket?

| Lubna Kably | TNN | Jan 31, 2025, 20:36 IST

Budget 2024 expectations: The long-term capital gains tax provisi... Read More

MUMBAI: The long-term capital gains tax provisions are not fair to certain taxpayers, and this requires an amendment in the upcoming Budget 2024. Income-tax (I-T) is a progressive tax mechanism, the more you earn the more you pay. Understandably, the very rich, having a taxable income of over Rs 5 crore pay tax at the rate of 42.74 per cent , whereas those having a taxable income of Rs 5 lakh or less fall in the ‘nil’ tax bracket.

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The latter stand to benefit because of a rebate mechanism, that was introduced by the interim budget of 2019. A rebate is a deduction from the I-T payable and section 87A of the I-T Act allows for a full rebate from tax for an individual having income up to Rs. 5 lakh subject to an upper cap of Rs. 12,500. Thus, while the basic exemption limit is Rs. 2.5 lakh under the old regime and Rs. 3 Lakhs in the new regime owing to the rebate an individual with an income of up to Rs. 5 lakh and up to Rs. 7 lakh under the old and new regime respectively, do not have to pay tax.

In fact, if the taxpayer under old regime takes the full benefit of Rs. 1.50 lakh available as a deduction for various investments made during the year (such as public provident fund, repayment of housing loan, LIC Premium, tax saving mutual funds), a gross income of up to Rs. 6.50 lakh may not attract any I-T at all. In addition, if such taxpayer is salaried, the standard deduction of Rs. 50,000 would ensure that a gross income of up to Rs. 7 lakh may not attract any tax. (Refer Case 1).

Case 1
Particulars	Amount
Gross Taxable Income	7,00,000
Standard Deduction	50,000
Deduction under Section 80C	1,50,000
Net Taxable Income	5,00,000
Income-tax	12,500
Tax Rebate	12.500
Net tax	Nil

However, the same taxpayer can be in for a rude shock if he has earned long-term capital gains, for which a ‘concessional’ rate of tax at 20 per cent is prescribed under section 112. For instance, long-term capital gains arising on sale/transfer of debt mutual funds, unlisted equity shares, immovable property are taxed under this section at 20 percent, with indexation benefit.

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Need for an amendment: “While the concessional tax rate under section 112 can be an advantage for an individual in the higher tax brackets, it works to a great disadvantage for an individual who is having his/her taxable income, including long term capital gains, at less than Rs. 5 lakh. Under the new regime this disadvantage will continue for a person having income less than Rs. 12 Lakhs,” explains Ketan Vajani, chartered accountant.

Vajani goes on to illustrate: An individual, offering his income under old regime, has sold his residential house and has earned a long-term capital gain of Rs. 4 lakh. His other income, during this particular financial year is just Rs. 75,000, which takes his total income to Rs. 4.75 lakh. As per the rational of section 87A, his tax liability should be nil.

Unfortunately, he will end up paying a tax of Rs. 32,500. Here is how (Refer Case 2).

Case 2
Particulars	Amount	Amount
Long term capital gains		4,00,000
Other income		75,000
Total taxable income		4,75,000
Tax on other income		Nil
Long Term Capital	4,00,000
Less : Deficit of Basic Exemption * (2,50,000 – 75,000)	(1,75,000)
Long Term Capital Gains subjected to tax	2,25,000
Tax on LTCG @ 20 per cent		45,000
Total Tax Liability		45,000
Tax Rebate		12.500
Net tax		32,500
*A basic exemption of Rs. 2.5 lakh is available against LTCGs. For those between 60-80 years of age, this is Rs. 3 lakh for those who are 80 plus it is Rs. 5 lakh.

“Even after getting rebate a rebate of Rs. 12,500, this individual will end up paying Rs. 32,500 as basic tax, plus a cess of Rs. 1,300 bringing his total tax liability to Rs. 33,800. In short – he is paying tax even if his total income is less than Rs. 5 lakh,” explains Vajani.

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Under the new regime, the tax rate of 20 per cent is provided beyond the income level of Rs. 12 Lakhs and accordingly the disadvantage will continue to the taxpayers having income up to 12 Lakhs, beyond which the calculations will be tax neutral.

The Chamber of Tax Consultants had in the past represented that considering the inequity that is created, section 112 should be amended. Tax on long term capital gains should be charged at 5 per cent (instead of 20 per cent), in cases where the total income, including such long-term capital gain is more than the basic exemption limit of Rs. 2.5 lakh but less than Rs. 5 lakh or 7 lakh (for the new regime). Now with the optional tax regimes in place, the need for such an amendment is even more acute.

ITR e-Filing: Which Is The Correct Income Tax Return Form For You?

Income Tax Return filing on incometax.gov.in for FY 2023-24: With the July 31 deadline for ITR filing for AY 2024-25 coming closer, it’s important for taxpayers to ensure that they file their income tax return using the correct ITR form. So which ITR form is applicable to you? Is it ITR-1, ITR-2, ITR-3, ITR-4, ITR-5, ITR-6 or ITR-7? Shalini Jain, Tax Partner at EY India in a column in ET explains who can file which ITR form. Let’s take a look: (AI image)

ITR-1 can only be filed by an individual qualifying as ordinarily resident. The individuals should have a total income of up to Rs 50 lakh (after clubbing of income, if any). Their earnings should come from sources like salary or family pension, one house property, other sources like interest, and agricultural income. Agricultural income should be no more than Rs 5,000 after any clubbing. In case of clubbing of income, an individual can file ITR-1 if the income of the other person (whose income the individual is reporting in his ITR) is from sources as mentioned above. (AI image)

The following entities cannot file ITR-1: Hindu Undivided Family or HUF, non-residents/resident but not ordinarily resident, director in a company, those with agricultural income over Rs 5,000, ordinarily residents with total income above Rs 50 lakh, those holding assets outside India, those holding investments in unlisted shares, entities with capital gains/losses, income from more than one house property, profits or gains from business or profession, wins from lottery, having income from outside of India on which double taxation relief is to be claimed, those having brought forward losses or losses to be carried forward, those with TDS deductions on cash withdrawals exceeding Rs 1 crore (Rs 20 lakh in some cases), those who have deposited sums in excess of Rs 1 crore in banking company or co-operative bank in a year. Those who are covered under the tax deferral relief for income from ESOP available to employees of ‘eligible startups’ can’t file ITR-1 as well.

ITR-2 form can be filed by non-residents/resident but not ordinarily residents; ordinarily residents who are not eligible to file ITR-1, HUF, director in a company, those holding investments in unlisted equity shares, those having income from sources like salaries, more than one house property, capital gains/losses, and income from other sources, those having income from sources outside India and holding assets outside India, those with incomes arising from sale or transfer of VDAs (NFTs, cryptocurrencies etc.). Individuals or HUF having business income or income from profession cannot file ITR-2. (AI image)

ITR-3 can be filed by individuals, HUF having business income, income from profession, partner of a firm. Persons other than individuals, HUF having business income or income from profession cannot file ITR-3. (AI image)

ITR-4 form can be filed by resident individuals, HUF, firm (other than LLP) having total income up to Rs 50 lakh. Those having business income, income from profession computed on ‘presumptive business’ can also file ITR-4. Those having profits or gains from business or profession which are not computed on a presumptive basis cannot file ITR-4. (AI image)

Any person except individual or HUF or company, example firms, LLPs, Association of Persons (AOPs), business trusts and investment funds. Any individual, HUF or company cannot file ITR-5. Also any other person required to file ITR-7 cannot file ITR-5. (AI image)

ITR-6 filing applicability: Companies other than those filing ITR-7 can file ITR-6. However, it is important to note that the companies that are required to file ITR-7 cannot file ITR-6. (AI image)

ITR-7 filing: Persons including companies which are a charitable or religious trust, political party, research association, news agency or similar organisations specified in the Act can file tax return using ITR-7. (AI image)

ITR Filing New Vs Old Tax Regime: It’s important to note that the new income tax regime is now the default income tax regime. If a salaried individual wished to file tax return using the old income tax regime, then it is necessary to do so within the July 31, 2024 deadline. Any tax return filed after that will automatically be processed under the new income tax regime, and in case the old tax regime works better for you, the default switch to the new one may result in higher tax liability. (AI image)

Lubna Kably is a senior editor, who focuses on various policies a... Read More

Top Comment

Manoj Kumar Gupta

203 days ago

10% people are holding 90% wealth of any nation in general and rest 90% only 10% wealth. So these 10% people should pay all govt taxes, rest 90% people should be spared of any taxes.

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