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, with the rebate, an individual with an income of up to Rs. 5 lakh bears no tax burden.
In fact, if the taxpayer 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 ‘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.
Need for an amendment: “While, the concessional tax rate under section 112 can be an advantage for an individual in the higher tax bracket, 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,” says Ketan Vajani, chartered accountant and president, The Chamber of Tax Consultants (CTC). In fact, this association of professionals has included this issue in its pre-budget memorandum presented to officials of the Ministry of Finance.
Vajani goes on to illustrate: A retired person has sold his residential house and has earned a long-term capital gains 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.
The Chamber of Tax Consultants have 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.
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