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

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.
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).

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).

“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.