Shanta Chatterjee (name changed) is a senior citizen lady getting a family pension. To save taxes, she reduced her investments in bank fixed deposit (FD) and invested in an Equity Linked Savings Scheme (ELSS) on a regular basis for some years, till the interest on FD fell below the taxable limit.
However, with the appreciation in family pension, her gross income again became over Rs 5 lakh.
To bring it back below Rs 5 lakh, she invested Rs 60,000 in a tax-saving FD last year.
On the other hand, she carefully redeemed some of the units in ELSS, ensuring that the long-term capital gain (LTCG) doesn’t exceed the tax-free limit of Rs 1 lakh.
While filing her Income Tax Return (ITR), she found that after all the deductions, her aggregate income fell slightly below Rs 4.95 lakh and the LTCG on redemption of ELSS units was around Rs 76 thousand, also well within the tax-free limit of Rs 1 lakh.
While on the aggregate income, she was eligible to get full tax rebate, the LTCG was also within the tax-free limit.
Although, no tax was payable respectively on both the aggregate income and the LTCG, while filing her ITR, she was asked to pay Rs 10,118 (tax of Rs 9,729 and cess of Rs 389). Being a senior citizen, she was spared from paying interest on tax payable.
When asked why she has been asked to pay tax, despite the fact the aggregate income is below Rs 5 lakh and the LTCG is below Rs 1 lakh, CA Karan Batra, Founder and CEO of CharteredClub.com, said “Rebate u/s 87A is not allowed in this case as the aggregate income, including LTCG, is more than Rs 5 lakh,” adding, “For the purpose of Section 87A, her income is Rs 5.7 lakh.”
Despite the fact that the LTCG is below the tax-free limit of Rs 1 lakh, it is added to the aggregate income, spoiling her chance to get full rebate on tax payable u/s 87A of the Income Tax Act.
So, you may not pay a capital gain tax on redemption of equities and/or equity-oriented mutual fund (MF) schemes by keeping the LTCG within the tax-free limit of Rs 1 lakh in a financial year, but the gain amount will still be added to your aggregate income to determine your eligibility to get rebate on tax payable.
As a result, despite keeping the aggregate income within Rs 5 lakh and LTCG within Rs 1 lakh, you may still end up paying tax, as addition of LTCG would push up the total income above Rs 5 lakh, making you ineligible to get tax rebate.