When and How Capital Gains Tax Can be Reduced

Published: June 23, 2017 at 10:15 am

Last Updated on

Under certain circumstances, long-term or short-term capital gains tax to be paid can be significantly reduced. It is not routinely possible and therefore important to recognize this possibility if and when it arises. This post stems from a discussion at Facebook Group Asan Ideas for Wealth, started by Subrat Dash, with the circumstances explained by Ashal Jauhari and contributions by Harrsh Ankola.

For the purposes of this post, 80C shall refer to the sum of all deductions (eg. 80D, 80G …_) possible under Chapter VI-A. So please treat 80C here as a nickname and not in the literal sense. Section 80C is far more recognizable than Chapter VI A!

For all the calculations we will consider a resident taxpayer, less than 60 years old.

Let us go through a series of Examples. Please note these examples are not everyday examples but can occur in certain instances. For example, a single earner making 1.5L a year can never invest 1.5L in an 80C instrument. But a second earner can if the primary earner handles all expenses.

All these examples are from numbers entered in ITR2. NOTE: Enter the basic information like age, nationality etc before using the form else it will not calculate.

Example 1: Total Income from Salary = 4 Lakh.

80C deduction = 1.5L

What is the taxable income?  4L – 1.5L = 2.5L.

What is the tax to be paid? Zero.

Example 2: Total Income from Salary = 1 Lakh.

What is the taxable income? Zero

Now suppose, 80C investment = 1.5L (the effective deduction allowed = 1L)

What is the taxable income?  Zero again.

Now, to arrive at this, would you

(a) Say 1 Lakh < 2.5 Lakh, so no taxable income


(b) 1 Lakh  (salary)- 1 Lakh (80C) = 0. So no taxable income?

If you wish to complete reading the entire post (explained below), (a) vs (b) will come in handy. For now, leave it be.

Example 3: Total Income from Salary = 1 Lakh.

No 80C investments.

Taxable income = zero.

Suppose, there was a taxable long-term capital gain  (say from the sale of a house or debt fund etc.) or a short-term capital gain (all such gains are taxable) of say 3 Lakh, what is the taxable income.

Yes, yes it will not happen every financial year, but it can and as explained below I think it is the duty of the income tax department to account for it in a consistent manner.

When there are no 80C investments, there is no problem.

The income from salary = 1 lakh.

The tax-free income limit = 2.5 Lakh. Room in the tax-free bracket = 1.5L

Reported taxable capital gain = 3 Lakh.

The law permits you (and does this automatically in ITR forms) to take an amount equal to the room in the tax-free bracket from the capital gains and add it to the income.

So in this case the total income = 1L + 1.5L(from capital gains ) = 2.5L (there is no tax on this income)

The taxable capital gain is reduced to 1.5L. That is a significant reduction!!

Credit to Mr. Sundaram Anathkrishnan for educating on this a couple of years ago. He went to great trouble in digging out official example illustrating this. You can test this out in ITR2.

Example 4: Total Income from Salary = 1 Lakh.

Total 80C investments = 1 Lakh.

Taxable Capital Gain = 3 Lakh.

What is the taxable income and taxable capital gain?

This is what the IT department is doing:

First it computes net income as = 1L(salary) – 1L(80C) = 0

So the room in the tax-free bracket is the full 2.5L

So it says, taxable capital gain = 3L – 2.5L = 0.5L

Taxable income = Zero.

Let us do one more with arbitrary nos

Example 5: Total Income from Salary = 2,00,123

Total 80C investments = 99,877.

Reoprted Taxable Capital Gain = 2,51,239.

What is the taxable income and taxable capital gain?

The taxable income is already zero.

But the IT dept first calculates 2,00,123 – 99,877 = 1,00,246

Then it says, then tax free income limit = 2.5L So there is a room of
2,50,000 – 1,00,246 = 1,49,754.

It then deducts this “room” from the reported capital gain of 2,51,239.

2,51,239 – 1,49,754 = 1,01,485

So it say 1,01,485 (rounded to 1,01,490) is the taxable capital gain!

That is a reduction of nearly 60% in the taxable capital gain

Timeout: What follows is my opinion as to how the above calculation is flawed and that the tax outgo should be higher. In other words, an inaccuracy or a loophole if one can call it that. You can stop reading the post if you dont care for what I have to say – often a smart move.

What is my problem anyway?

Example 4 Revisited: Total Income from Salary = 1 Lakh.

Total 80C investments = 1 Lakh.

Taxable Capital Gain = 3 Lakh.

What is the taxable income and taxable capital gain?

The IT department deducts  2.5L from the capital gain of 3L because it computes the net income as 1L(salary) – 1L(80C) = 0

The 1L is already tax-free income and it is deducting the 80C investment from it.  This is similar to double-counting. A deduction from taxable income is applied to tax free income. Which I think is wrong.

When income is less than tax-free limit, 80C deductions have no relevance.

Therefore in this example, in my opinion, only 1.5L from capital gains should be added to income and the rest 1.5L is the taxable capital gain.

Since it deducts 80C investment from tax-free income, it is able to add 2.5L of the capital gains, resulting only in 0.5L taxable capital gain.

Dear income tax department, applying a deduction from taxable income to tax free income makes no sense. It will not matter in ordinary circumstances. However, it can result in a significant reduction of taxable capital gains.

The formula used for calculating taxable capital gain is

If (total-income -2.5L – total-deductions) > 2.5 Lakh

Taxable Capital Gain = Reported Capital Gain


Taxable Capital Gain = (Total-Capital-Gain-Reported) + (total-income -2.5L – total-deductions)

Now, when total income  = total deductions, a maximum deduction of 2.5L is possible from the reported capital gains.

When total income = 2.5L, the total deductions can be deducted from the reported capital gains.

I believe this is due to an incorrect double deduction when income < 2.5L

(total-income  – 2.5L total-deductions).

Anyway, who cares what I think anyway.

The title says when and how capital gains tax can be reduced. I have discussed the when.  The how,  legally rare as it is, should be self-evident.

Note: I have expressed an opinion about an existing rule. I am sure most of you will disagree. If the above scenario can be interpreted in a different manner, please disucss below.


GameChanger- Forget Startups, Join Corporate & Live The Rich Life You want

My second book, Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantco-authored with Pranav Surya is now available at AmazonOpens in a new window as paperback (₹ 199) and Kindle (free in unlimited or ₹ 99 – you could read with their free app on PC/tablet/mobile, no kindle necessary).

It is a book that tells you how to travel anywhere on a budget and specific investment advice for young earners.


You can Be Rich Too with Goal-Based Investing 

is my first book with PV Subramanyam. It helps you ask the risk questions about money, seek simple solutions and find your own personalised answers with nine online calculator modules.

The book is available at:

Amazon Hardcover Rs. 271. 32% OFF

Infibeam Now just Rs. 270  32% OFF. If you use a mobikwik wallet, and purchase via infibeam, you can get up to 100% cashback!!

Flipkart Rs. 279. 30% off

Kindle at Amazon.in (Rs.271) Read with free app

Google PlayRs. 271 Read on your PC/Tablet/Mobile

Now in Hindi!

Pre-order the Hindi version via this link

Do share if you found this useful
Share your thoughts on this topic at the  Reddit freefincal_user_forum

Reach your financial goals like a pro! Join our 1600+ Facebook Group on Portfolio Management! You can now reduce fear, doubt and uncertainty while investing for your financial goals! Sign up for our lectures on goal-based portfolio management and join our exclusive Facebook Community. The 1st lecture is free!
Want to check if the market is overvalued or undervalued? Use our market valuation tool (will work with any index!) or you buy the new Tactical Buy/Sell timing tool!
About the Author Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management. He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations on the basis of money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association. For speaking engagements write to pattu [at] freefincal [dot] com
About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on developments in mutual funds, stocks, investing, retirement and personal finance. We do so without conflict of interest and bias. We operate in a non-profit manner. All revenue is used only for expenses and for the future growth of the site. Follow us on Google News Freefincal serves more than one million readers a year (2.5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any kind of paid articles, promotions or PR, satire or opinions without data. All opinions presented will only 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, seek the right answers and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now. It is also available in Kindle format.
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 low cost! Get it or gift it to a young earner

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is a deep dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, 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 199 (instant download)
Free android apps