Tax Rebates Under 87A for all Capital Gains Except LTCG on Equity

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Income tax is a very challenging subject for many individuals and companies alike. You can be sure to find individuals stressed and harrowed during tax season as they try to make sense of their taxes. Indian tax has a lot of rules and regulations and navigating through it is like navigating through a maze. But you can find comfort in the fact that you are not alone, there are many others like you in the same boat.

An interim budget, in India, is presented when the government does not have time to present a full budget. The word interim which means temporary needs to be stressed here. An interim budget contains details of every expense and income that will come in the way of the government in the coming financial year. This year, the interim budget was presented on February 2019 by the finance minister, Piyush Goyal.

Highlights of Interim Budget, 2019

  • Full exemption of income tax for individuals whose total taxable income is less than Rs.5 lakh.
  • The standard deduction for the salaried people has been increased from Rs.40, 000 to Rs.50, 000 which will result in a tax benefit of around Rs.4700 crores to more than 3 crores individuals.
  • Rollover of capital gains has increased benefits gained from investment in one residential house to two residential houses and having tax gains of up to Rs.2 crores.
  • The threshold of TDS on interest earned from bank and deposits in the post office has been increased from Rs.1, 80, 000 to Rs.2, 40, 000 which will bring in much-needed relief to small tax payers.
  • It has been proposed to levy income tax on the notional rent on a second self-occupied house, by putting in amendments to section 23 of the Income Tax Act.

This is the simplified version of some of the changes introduced through the interim budget of February 2019. Many other changes are being proposed under many different heads. All the taxpayers should go through them. In the following sections, we will be concentrating on the tax rebates one can get under section 87A of the Income Tax Act, 1961 after the tax exemption limit has been increased from Rs.3.5 lakh to Rs.5 lakh.

What is Section 87A?

Section 87A of the Income Tax Act, 1961 has been abuzz among finance and tax enthusiasts since the interim budget for the year 2019-2020 was passed. Although there was no change done to the existing tax slabs of an individual tax payer, what has changed is the income limit to claim tax exemption or zero income tax. The changes made to this section changed in income level to claim a full tax rebate. For the last financial year, individual taxpayers who were earning a net taxable income of Rs.3.5 lakh were eligible for a full tax refund but from the financial year 2019-2020, people whose net taxable income is up to Rs.5 lakh can get a full tax rebate. This section states under which heads an individual claim can tax rebates. It specifies the tax slab that every taxpayer has to follow to understand under which slab they fall and how much tax they have to pay.  

This is an incredibly important section and people look forward to the budget every year to know changes in this particular section. People are eligible to claim rebates under this section under different income heads. The section itself was included in the Income Tax Act, 1961 in the year 2013 by a Finance Act.

Important Points about Section 87A

The most important points to look for in section 87A of the Income Tax Act, 1961 are:

  • Any changes done to the section are applicable from 1stApril of the financial year. The changes will be valid for all other subsequent years.
  • Only a resident Indian citizen can avail off rebates.
  • NRIs cannot get rebates under this section.
  • To claim rebate your net taxable income for the financial year 2019-2020 must not be more than Rs.5 lakh.
  • The maximum rebate that can be claimed under section 87A is Rs.12, 500. This means that is the total payable tax is less than or equal to Rs.12, 500 than the taxpayer can claim a full rebate. Previously, this figure was Rs.2, 500.
  • One can also claim tax rebates against tax liabilities arising from sale or transfer of short term capital gains.
  • One cannot, however, gain tax rebates on long term capital gains of sale or transfer of equity.

Eligibility to Claim Tax Rebates Under Section 87A for the Financial year 2019-2020

One can claim tax rebates under section 87A for the year 2019-2020 only if the conditions given below are met:

  • Must be a resident of India.
  • Tax rebate is limited to Rs.12, 500 and lower. Rebate will be applied before the addition of education cess, to the total tax.
  • Total income, minus all deduction (under section 80), must be equal to or less than Rs. 5 lakh.

Example of How Section 87A will Look Like at Different Income Levels (2020-2021)

Net Taxable Income

Tax

Rebate under section 87A

Net tax payable

Rs.2,70,000

1,000

1,000

0

Rs.3, 00, 000

2, 500

2, 500

0

Rs.4,00,000

7,500

7,500

0

Rs.5,00,000

12,500

12,500

0

Rs.5,50,000

22,500

0

22,500


Eligibility to Claim Tax Rebates Under Section 87A for the Financial Year 2019-2020

  • Tax rebates are only offered to resident Indians
  • Total income after deductions (under section 80) must not exceed Rs.3.5 lakh
  • The tax rebate is limited to Rs. 2, 500 and lower. The rebate will be applied before education cess is added.

Example of How Section 87A will Look Like at Different Income Levels (2018-2019)

Net Taxable Income

Tax

Rebate under section 87A

Net tax payable

Rs.2,65,000

750

750

0

Rs.3,00,000

2,500

2,500

0

Rs.3,50,000

5,000

2,500

2,600


What is Holding Period Under Sale and Purchase of Capital Assets?

To claim a tax rebate on sale or redemption of equities depends on a holding period: short term or long term. Holding period refers to the period between the purchase and sale of equity. If the holding period is less than 12 months then it is deemed to be short term. Previously the short term holding period was 36 months but it got reduced to 12 months for all listed equity shares and the units of mutual funds but it was again changed to 36 months for all the units other than equity.

A long term capital gain would occur if the waiting period was more than 12 months in case of equity. In the case of land and building, however, the holding period requirement is 24 months.

Tax Rebates Under Sale and Redemption of Capital Assets: Equity

Any dividend received from the mutual funds is fully exempted of income tax because the mutual fund house pays dividend distribution tax on it, at the time of payment of dividends.

In the case of profits on sale and redemption of equity-based mutual funds, the tax rate is different based on whether they are short term or long term holding period. For short term holding period, capital gains tax at a flat rate of 15% is charged but in case of long term holding period, capital gains tax exemption is allowed up to Rs.1 lakh beyond which 10% rate is charged. However, it is important to note that these rates are applicable only if the securities transaction tax (SST) has been paid at the time of sale.

So even if your total income is less than Rs.5 lakh you still have to pay tax on long term capital gains up to Rs.1 lakh.

For example, if Mr. B has a total income of Rs. 4, 50,000 after all deductions. Out of this, Rs.2 lakh is income from salary and rest is long term capital gain from the sale of his equity shares. His tax on income from salary will be nil since it is below Rs.5 lakh but on his long term capital gain, capital gains tax will be levied on Rs.1, 00, 000 at 10% flat rate and 4% education cess. So Mr. B has to pay a tax of Rs.10, 400.

How to Claim the Rebate Under Section 87A?

Any taxpayer can claim tax rebate under section 87A as per all the conditions stated above during income tax return paying season. For all the individuals, this season comes during 31st July of every year, just before the start of the new financial year. A financial year runs from 1st April to 31st March of next year. One has four months of ample time to file their tax returns.

Be sure to check up on the eligibility terms stated above to know how much rebate you are allowed for the current financial year.

Tax can be confusing. But with a bit of research beforehand, it is not too hard. While it is very easy to recruit a tax consultant or a chartered accountant to do your taxes, everyone should understand taxes themselves. Knowledge gain is no crime and in the process, if you are confident enough to do your taxes yourself, you will save yourself quite a bit of money.

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