Mint Explainer: Can capital gains make you ineligible for a tax rebate?

Though the announcement was widely welcomed, it failed to address a critical question – does income from capital gains affect a person’s eligibility for the rebate? In other words, if a person with a ₹12 lakh salary earns an additional ₹1 lakh from capital gains, will they lose the rebate or will they only have to pay tax on the capital gains?

This confusion isn’t new. Even with the current ₹7 lakh rebate threshold, tax experts are confused about whether capital gains are clubbed under total income when determining whether a person is eligible for a rebate.

Mint reached out to the Central Board of Direct Taxes (CBDT), but experts said some ambiguity still remains.

What did the CBDT say?

V Rajitha, official spokesperson for CBDT, said the tax treatment depends on the wording of the finance bill – specifically whether capital gains are considered part of a person’s normal income or not when determining their eligibility for a rebate.

“Since capital gains are classified as special-rate income, they do not qualify for the rebate. However, their impact on overall tax liability depends on the way the rebate is structured — whether it is based solely on normal income or the total taxable income,” she said.

“If the rebate applies only to normal income, an individual with a ₹12 lakh salary and any additional capital gains should still be eligible for the rebate on salary income,” Rajitha said. “However, if capital gains are included when determining whether a person is eligible for a rebate, then exceeding ₹12 lakh may disqualify him from the rebate. The Finance Bill’s specific language will determine this aspect,” she added.

This confusion exists under the current rules, too. “Under existing provisions, the Section 87A rebate applies if total income (including capital gains) is below ₹7 lakh, and capital gains are taxed separately. However, If capital gains push total income above ₹7 lakh, the rebate may not be available,” she said.

So, what should you do?

CBDT’s response failed to clarify the main question: will you get a rebate if capital gains push your total income above ₹12 lakh?

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If you are in such a situation, you’ll have to apply your own interpretation – with guidance from a reputable chartered accountant – when filing your return.

What do the Big Four accounting firms say?

Deloitte, EY, KPMG and PwC all have different opinions on how the tax will be calculated.

Sonu Iyer, tax partner and national leader-people advisory services at EY India, said the rebate should still apply to salary income, and capital gains will be taxed separately. “Short-term capital gains (STCG) and long-term capital gains (LTCG), which are taxable at special rates, will be taxed separately.” This means a person whose total income exceeds ₹12 lakh because of capital gains will receive a rebate, and the capital gains will be taxed independently.

Sanjay Tolia, partner at Price Waterhouse & Co. Chartered Accountants LLP, had the same view. “If a person’s total income exceeds ₹12 lakh because of capital gains, the rebate will still be available and capital gains will be taxed separately, he said.

He added that marginal relief will come into play for people whose total income slightly exceeds ₹12 lakh. “A person with an income of ₹12.10 lakh would have to pay ₹61,500 in tax without marginal relief. However, marginal relief reduces this ₹10,000,” he said.

However, Aarti Raote, partner at Deloitte India, had a different view. She said the rebate becomes void if total income, including capital gains, exceeds ₹12 lakh. “As per publicly available information, if a taxpayer has ₹12 lakh in salary income and ₹1 lakh in capital gains, the rebate under Section 87A will not apply because the total income exceeds ₹12 lakh,” she said. Such an individual would be taxed on their entire ₹12 lakh salary, although marginal relief could help reduce the tax.

Parizad Sirwalla, partner and head of global mobility services and tax at KPMG India, echoed this view, saying total income, including capital gains, must remain within ₹12 lakh for a person to qualify for the rebate. “If the ₹12 lakh salary is the net taxable income after applying the standard deduction, adding ₹1 lakh from capital gains pushes the total income to ₹13 lakh, making them ineligible for the rebate,” she said.

Gireesh Chandra Prasad contributed to this article.