Readers often ask, “How much capital gains tax should I pay if I have no other income source?”
The answer is quite simple. Up to the tax-free limit (using the then prevailing tax slabs), the capital gains are tax-free if there are no other sources of income (this is quite rare, if not impossible). We shall see examples below.
A reader also asked if this rule applies to the new tax regime. Yes, it is. According to tax expert Manmohan Sethumadhavan, This works by a proviso in sections 112 & 112A of the IT Act, which states,
Provided that in the case of an individual or HUF, being a resident, where the total income as reduced by such long-term capital gains is below the maximum amount which is not chargeable to income-tax, then it shall be reduced by the amount which is not chargeable to income-tax.
Now, let us consider some examples using the new tax regime.
Warning: These examples may give investors ideas about how to save tax in retirement. It is perilous to depend only on income from mutual funds unless you are super rich! These examples are far from practical and only serve to illustrate the law.
Example 1
No other sources of taxable income
Age < 80
Capital gains from equity mutual funds = Rs. 4 lakhs.
Tax to be paid = zero.
Explanation: Up to Rs. 3 lakhs is tax-free. The first Rs. 1 Lakh capital gain from equity mutual funds is tax-free.
The tax-free limit for all other capital gains = Rs. 3 lakhs
Example 2
Income after accounting for standard deduction: Rs. 1 Lakh
Age < 80
Capital gains from equity mutual funds = Rs. 4 lakhs.
Tax to be paid = Rs. 10,400
Explanation: Up to Rs. 3 lakhs is tax-free. So, Rs. 2 lakhs of the capital gain is tax-free by this. Then, Rs. 1 Lakh capital gain from equity mutual funds is tax-free. So this leaves Rs. 1 Lakh CG. So 10% tax is Rs. 10,000 + Rs. 400 Health & Education Cess.
Capital gains from equity mutual funds = Rs. 6 lakhs.
Tax to be paid = zero.
Explanation: Up to Rs. 5 lakhs is tax-free. The first Rs. 1 Lakh capital gain from equity mutual funds is tax-free.
The tax-free limit for all other capital gains = Rs. 5 lakhs
Example 4
No other sources of taxable income
Age < 80
Capital gains from mutual funds with 35% < equity < 65% = Rs. 5 lakhs.
Tax to be paid = Rs. 15,600.
Explanation: Up to Rs. 3 lakhs is tax-free. The remaining Rs. 2 lakhs is taxable at 20% with indexation. (We shall ignore the indexation here). This is Rs. 40,000
Rebate u/s 87A: Rs. 25,000
So net tax is. Rs. 15,000
Health & Education Cess: Rs. 600. So total Rs. 15,600
So up to Rs. 4.25 lakhs is tax-free.
Example 5
No other sources of taxable income
Age > 80
Capital gains from mutual funds with 35% < equity < 65% = Rs. 7 lakhs.
Tax to be paid = Rs. 15,600.
Explanation: Up to Rs. 5 lakhs is tax-free. The remaining Rs. 2 lakhs is taxable at 20% with indexation. (We shall ignore the indexation here). This is Rs. 40,000
Rebate u/s 87A: Rs. 25,000
So net tax is. Rs. 15,000
Health & Education Cess: Rs. 600. So total Rs. 15,600
So up to Rs. 6.25 Lakhs is tax-free.
Example 6
Income after accounting for standard deduction: Rs. 1 Lakh
Age < 80
Capital gains from mutual funds with 35% < equity < 65% = Rs. 4 lakhs.
Tax to be paid = Rs. 36,400.
Explanation: Up to Rs. 3 lakhs is tax-free. The remaining Rs. 2 lakhs pf CG is taxable at 20% with indexation. (We shall ignore the indexation here). This is Rs. 40,000
Rebate u/s 87A: Rs. 25,000
So net tax is. Rs. 15,000
Health & Education Cess: Rs. 600 So total Rs. 15,600
We want to reiterate that it is impractical to assume all income after retirement would only be from capital gains (it is possible for some people but relatively rare). This is way too risky. So go easy thinking about those SWPs!
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Dr 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 13 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, AUM-independent investment advice.
Published by CNBC TV18, this book is designed to help you ask the right questions and find the correct answers. Additionally, it comes with nine online calculators, allowing you to create custom solutions tailored to your lifestyle. Get it now.
This book is designed for young earners to get their basics right from the start! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.
This is an in-depth exploration of vacation planning, including finding affordable flights, budget accommodations, and practical travel tips. It also examines the benefits of travelling slowly, both financially and psychologically, with links to relevant web pages and guidance at every step. Get the PDF for Rs 300 (instant download)