How much capital gains tax should I pay if I have no other income source?

Published on / By M. Pattabiraman Twitter: @pattufreefincal

Published: May 21, 2024 at 6:02 am

Last Updated on May 21, 2024 at 10:24 am

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.

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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.

Note: Rebate u/s 87A does not apply to Long Term Capital Gains u/s 112A(Charged to tax @ 10%). That is equity mutual funds or shares. Also, see 87A tax rebate benefits are lost if non-taxable MF LTCG is added to ITR! The rebate applies to other long-term and short-term capital gains.

Example 3

  • No other sources of taxable income
  • Age > 80
  • 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!