Salaried taxpayers having capital gains not only face harrowing time while filing their Income Tax Return (ITR) as they can no longer enjoy the comfort of filing ITR-1, but also get rattled often due to demand for additional taxes despite tax planning.
This is because salaried taxpayers mostly take into account their salary and FD interest to calculate total income and make tax-saving investments accordingly under the Old Income Tax Regime to save maximum tax.
Taxpayers having gross total income up to Rs 7.5 lakh try to make maximum tax-saving investments to avail full tax rebate of up to Rs 12,500 to make the tax outgo nil.
The incomes such taxpayers mostly ignore are interest on savings bank accounts, interest on income tax refund, if any, and capital gains, where applicable.
Many salaried persons invest in mutual funds (MFs) to get the benefits of equity investments in a lesser risky way and to avail tax deduction u/s 80C of the Income Tax Act through investments in Equity Linked Savings Scheme (ELSS), and any redemption of such investments result in capital gain.
While the entire short-term capital gain (STCG) on debt and equity-oriented MF schemes and long-term capital gain (LTCG) on debt funds are taxable, LTCG on equity funds up to Rs 1 lakh is tax free in a financial year.
As STCG on debt funds are added to taxpayers’ income and taxed accordingly, it’s easier to take it into consideration during tax planning. On the other hand, LTCG on debt funds are taxed at a rate of 20 per cent after indexation.
While the STCG on equity funds is taxed at a rate of 15 per cent, the LTCG in excess of Rs 1 lakh in a financial year is taxed at a rate of 10 per cent.
The different rates and tax-free part of up to Rs 1 lakh make it difficult for taxpayers to accommodate capital gains while making their tax planning.
However, ignoring especially small LTCG on equity funds – taking it for granted as tax free – would ruin all your tax planning efforts to negate tax outgo by availing the full tax rebate.
This is because, despite it being tax-free, the LTCG on equity funds up to Rs 1 lakh is added to total income to determine the eligibility to avail tax rebate u/s 87A of the Income Tax Act.
So, if you are a salaried taxpayer having gross total income of up to Rs 7.5 lakh and have done your tax planning meticulously and invested accordingly to bring down the taxable income exactly to Rs 5 lakh to avail the full tax rebate of Rs 12,500, ignoring a LTCG of even Re 1 on redemption of equity funds – just because LTCG up to Rs 1 lakh is tax free – would result in a payout of Rs 13,000 (Rs 12,500 tax and 4 per cent cess on it). For senior citizens up to 80 years of age, however, the payout would be Rs 10,400 (including cess) and for those 80 years of age and above, there will be no payout.
So, as soon as you redeem units of any of your MF schemes, make sure that you take into account the amount of net capital gain to make your tax planning a holistic one.