No tax rebate u/s 87A allowed on short term gains from stocks and equity MFs

There was a recent change made by the income Income Tax Department that has left several tax payers in a blind.

So, if you were earning a total income of up to ₹7L, you were eligible for a tax rebate u/s 87A under the new tax regime. You could claim a maximum rebate of ₹25,000 which would bring your tax liability at normal slab rates to zero. This rebate was never allowed for LTCG from stocks and equity MFs, however STCG was eligible.

For example, if you have say ₹5L taxable salary and ₹2L in STCG, your tax liability would come to:

Tax on 5L at slab rate = ₹10,000

Tax on 2L at 15% = ₹30,000

Total = ₹40,000

Now, as the total income is below ₹7L, you’d be eligible for the ₹25,000 rebate and hence you’d end up paying ₹15,000.

But, as per the new calculation, this rebate has been disallowed on any kind of special rate income which would include the STCG from shares and equity MFs.

Hence, the new calculation would be:

Tax on 5L at slab rate = ₹10,000

Tax on 2L at 15% = ₹30,000

Total = ₹40,000

Rebate allowed = ₹10,000

Tax payable = ₹30,000

So, now, you’ll have to pay ₹30,000 as taxes.

Here are are few points to understand:

  • The rebate u/s 87A has been disallowed for special rate incomes under the new regime. But, the rebate of ₹12,500 allowed under old regime will continue to include short-term capital gains if your income is below ₹5L.

  • Special rate incomes includes any income which is not taxed as per the slab rate. For example LTCG and STCG from stocks and MFs, etc.

  • Only income taxed at slab rate will be considered for determining eligibility for the rebate. For instance, if someone has ₹6L salary and ₹5L STCG, a rebate will still be available on the salary income despite the total income being more than ₹7L.

Those who have already filed the return before this update may receive a demand later on once the ITR is processed. As this is a policy change, you’ll have to pay the differential amount whenever the demand is raised.

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Hi @Surbhi_Pal

This is a much needed article at present after the changes made by e-filing in the calculation w.e.f 5th July. Every person opting for the new regime and having income <=7 Lakhs including Capital Gains income is asking the same question “Why I have to pay taxes? Isn’t the rebte available till 7 Lakhs”.

Thanks a lot for detailing out.

Regards,
CA. Pulkit Garg

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Why are these clarifications being made so close to the due date of filing the returns ?

The department is needlessly making things complicated for small taxpayers. Why not just make the rebate available for 5 lakhs/7 lakhs levels under old/new regime irrespective of the source of income ?. It is not possible to estimate profit/loss on shares/mutual funds due to market movement, so why penalise small-time investors ?.

Thanks for the explanation @Surbhi_Pal.

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can you revise the return file from the new tax regime to the old tax regime? After the Tax Demand Notice 143(1)

Hi @hirenbhut93,

No, changing the regime won’t be possible when filing a revised return. You’ll have to continue with the regime that was chosen while filing the original return.

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Hi,

Under new regime, tax upto Rs. 7,00,000 works out to Rs. 20,000 as follows:

  • Upto Rs. 3,00,000: Tax = NIL
  • 3,00,001 to 7,00,000 : Tax = 20,000 (4,00,000 * 5%)
  • Total Tax = 20,000

A resident individual (whose net income does not exceed Rs. 7,00,000) can avail rebate under section 87A. But rebate amount of 25,000 exceeds the actual tax (as worked out above) ? Why the difference ?.

Hi @radhesh23k,

The rebate of ₹25,000 u/s 87A under the new tax regime was announced in 2023’s budget. Back then, the tax slabs under the new regime were different, and according to those anyone with an income of ₹7L would have a tax liability of ₹25,000. Hence, the rebate limit was kept to this amount.

However, the tax slabs under the new regime were revised again in this year’s budget. According to the new slabs, your calculation is correct. Someone with a taxable income of ₹7L will have a tax liability of ₹20,000 and hence, this will also be the maximum amount of rebate one can claim.

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