Important Tax Alert for Retail Investors: Capital Gains Can Now Erase Your ₹7 Lakh Tax Exemption
New Delhi: A critical update to the Income Tax Return (ITR) utility, effective July 23, 2024, means that the widely publicized “zero tax on income up to ₹7 lakh” under the new tax regime is no longer universally true for retail investors, especially those with capital gains from stocks or mutual funds.
According to Chartered Accountant Himank Singla, this change significantly impacts small investors. Previously, many believed that income up to ₹7 lakh would be entirely tax-free due to the Section 87A rebate. However, the revised ITR rules now state that any income taxed at special rates, such as short-term capital gains (STCG) under Section 111A or long-term capital gains (LTCG) under Section 112A, will disqualify individuals from claiming the Section 87A rebate under the new tax regime.
Singla warns, “The idea that everyone earning up to ₹7 lakh pays zero tax is now factually incorrect in several cases.” He clarifies that even a minimal amount of capital gains can lead to unexpected tax liabilities. “If your income includes even ₹1 that is taxed at special rates—like short-term or long-term capital gains, or lottery winnings—you lose eligibility for the Section 87A rebate under the new regime.”
Real-World Impact:
This means a salaried individual earning a total of ₹6.9 lakh, where ₹10,000 is from capital gains, will now be taxed on the entire ₹6.9 lakh, as the rebate is no longer applicable. “It’s a major blow to salaried individuals who dabble in the stock market or invest in mutual funds,” Singla added. He notes that these limitations could discourage retail participation in stocks and mutual funds, as investors who assumed small capital gains wouldn’t affect their tax liability will now face unexpected burdens.
Understanding Section 87A Rebate (FY 2024-25):
The Section 87A rebate, designed to reduce tax liability for resident individuals, is now subject to stricter conditions:
| Criteria | Old Regime | New Regime (Pre-July 23, 2024 Update) | New Regime (Post-July 23, 2024 Update) |
| Income till ₹5L (no special-rate income) | ✅ Rebate up to ₹12,500 | ✅ Rebate up to ₹12,500 | ✅ Rebate up to ₹12,500 |
| Income up to ₹7L (no special-rate income) | ❌ Not applicable | ✅ Rebate up to ₹25,000 | ✅ Rebate up to ₹25,000 |
| Income includes STCG (u/s 111A) | ✅ Rebate still allowed | ✅ Rebate allowed | ❌ Rebate disallowed |
Changes in Capital Gains Tax Rates (Effective July 23, 2024):
It’s also crucial to note changes in capital gains tax rates that coincide with this ITR utility update:
- Short-Term Capital Gains (STCG) under Section 111A: The tax rate on STCG from listed equity shares, equity-oriented mutual funds, and business trust units (where STT is paid) has increased from 15% to 20%. This applies to transfers made on or after July 23, 2024.
- Long-Term Capital Gains (LTCG) under Section 112A: The tax rate on LTCG exceeding ₹1.25 lakh from listed equity shares, equity-oriented mutual funds, and business trust units (where STT is paid) has increased from 10% to 12.5%. This also applies to transfers made on or after July 23, 2024, and the indexation benefit has largely been removed for most assets.
While a marginal relief provision exists for those slightly exceeding the ₹7 lakh threshold, Singla advises extreme caution. “Filing based on half-baked assumptions can lead to unnecessary tax outgo or notices. Know what qualifies, and file accordingly.”
This critical update emphasizes the need for taxpayers, especially those engaging in the stock market or mutual funds, to thoroughly understand their income sources and eligibility for rebates under the revised tax rules to avoid unexpected liabilities and optimize their tax outcomes.