87A tax rebate benefits are lost if non-taxable MF LTCG is added in ITR!

Published: June 29, 2022 at 6:00 am

Last Updated on July 2, 2022 at 9:17 am

A viewer on our YouTube channel asks, “I have a net taxable income of around 4.8L( excluding LTGC, after all the deductions) and LTGC( from Equity MF ) of 37k. So the problem I am facing is that whenever I am putting the LTGC amount in 112A then it is added back to my net income (4.8L+ 37K ) =5.27 Lac and I’m not getting the benefit of Rs. 12,500 rebate under section 87A and eventually taxed around 14k”. In this article, let us discuss this curious problem.

What is the 87A tax rebate? Income tax up to Rs. 2.5 lakhs is tax-free for those below 60 years of age. The 87A rebate allows us to reduce the tax on net total income* to zero provided the net total income is less than or equal to Rs. 5 lakhs.

* after 80C, 80D etc. deductions under the old tax regime or without these in the new tax regimen. We shall use the term “net total income” repeatedly below as it is key to this problem.

Let us consider a net total income of Rs. 4,80,000 without any equity LTCG. The tax to be paid is Rs. 9000 (before cess). The 87A rebate to be applied (before cess) is Rs. 9000. Therefore the tax to be paid is zero.

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥

Now let us include to this Rs. 4,80,000 an equity LTCG of Rs. 20,000. So the net total income = Rs. 5,00,000. It is important to understand that the 87A rebate does not apply to any capital gains.

The tax before cess is still Rs. 9,000 as equity LTCG equal to or below Rs. one lakh is tax-free. The 87A rebate is Rs. 9000 and the tax payable is zero.

Now consider an equity LTCG of Rs. 21,000. The equity LTCG tax is still zero. However, the net total income is now Rs. 5,01,000 and now the ITR form refuses to include the 87A rebate. The tax payable now is Rs. 9000!

Consider another example: Suppose the income after 80C,80D etc. deductions is Rs. 3,90,000. The tax is Rs. 4500 (before cess). The 87A rebate is Rs. 4500. So the next tax payable is zero.

Now add equity LTCG of Rs. 1.1 Lakhs. The net total income is Rs. 5 Lakhs. The tax payable (before cess) is Rs. 4500 + Rs. 1000 (10% of Rs. 10,000 equity LTCG. The first one lakh is tax-free). The 87A rebate is Rs. 4500 and the net tax payable is Rs. 1000. the rebate does not apply to the tax on capital gains.

What is the problem here? The IT dept includes equity LTCG to the net total income without accounting for the Rs. 1 lakh tax-free limit. Therefore if the net total income is above Rs. 5 lakh even if it is because of tax-free LTCG, the 87A rebate is not being applied. Another situation has been described here: No applicability of section 14A on LTCG exemption of Rs.1 Lakh.

This seems unfair in our opinion. Including a tax-free income to the total income does not make sense and even if done it should not increase the tax! The IT dept. should fix this inconsistency by only including the taxable portion of equity LTCG (beyond the first 1 Lakh) to the net total income before the 87A rebate is applied.

Do share this article with your friends using the buttons below.

🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! More than 1,000 investors and advisors use this!
New Tool! => Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
Follow Freefincal on Google News
Follow Freefincal on Google News
Subscribe to the freefincal Youtube Channel. Subscribe button courtesy: Vecteezy.
Subscribe to the freefincal Youtube Channel.
Follow freefincal on WhatsApp Channel
Follow freefincal on WhatsApp
Podcast: Let's Get RICH With PATTU! Every single Indian CAN grow their wealth! 
Listen to the Lets Get Rich with Pattu Podcast
Listen to the Let's Get Rich with Pattu Podcast
You can watch podcast episodes on the OfSpin Media Friends YouTube Channel.
Lets Get RICH With PATTU podcast on YouTube
Let's Get RICH With PATTU podcast on YouTube.
🔥Now Watch Let's Get Rich With Pattu தமிழில் (in Tamil)! 🔥
  • Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
  • Have a question? Subscribe to our newsletter using the form below.
  • Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!

About The Author

Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free!  One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course!  Increase your income by getting people to pay for your skills! More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!   
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Both boy and girl version covers of Chinchu gets a superpower
Both the boy and girl-version covers of "Chinchu Gets a superpower".
Most investor problems can be traced to a lack of informed decision-making. We made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So, in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it, as well as teaching him several key ideas of decision-making and money management, is the narrative. What readers say!
Feedback from a young reader after reading Chinchu gets a Superpower (small version)
Feedback from a young reader after reading Chinchu gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)