Can You Save Tax on Capital Gains Using the B
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Exemption Limit?
"Can You Save Tax on Capital Gains Using the Basic Exemption Limit?"Yes, according to the Income Tax Act, residents in India can set off both short-term capital gains and long-term capital gains against the basic exemption limit for income tax, subject to certain conditions. This option is open under both the old and the new tax regimes. The particular advantage of this adjustment accrues to people with total income, including capital gains, falling within the basic exemption limit. Thus, by opting for this particular mechanism, the concerned taxpayer can substantially reduce the tax on capital gains payable on investments in equity shares and equity-oriented mutual funds or may extinguish the tax altogether.
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🧾 Understanding Basic Exemption Limits in Both Regimes
. means the maximum income up to which an individual is not subject to income tax. The limits differ based on age and tax regime selected:
Under the Old Tax Regime (FY 2024-25 and AY 2025-26):
- Individuals, age below 60 years : ₹2.5 lakh
- Senior citizens, Age (60 to 79 years) : ₹3 lakh
- Super senior citizens (80 years and above) : ₹5 lakh
This regime applies various tax exemptions and deductions such as HRA, standard deduction, section 80C, and section 80D that jointly reduce taxable income.
Under the New Tax Regime (Section 115BAC):
- For Assessment Year 2025–26, the basic exemption limit is ₹3 lakh
- For Assessment Year 2026–27 onwards, it increases to ₹4 lakh
Unlike the old regime, the new regime offers lower slab rates but restricts most exemptions and deductions. However, even under this simplified regime, the adjustment of STCG and LTCG against the exemption limit is still allowed, as long as the taxpayer is a resident individual.
📉 How Capital Gains Are Treated for Tax Purposes
Once classified into short-term and long-term, each with specific taxation rules:
- STCG (Short-Term Capital Gains) on listed equity shares and equity-oriented mutual funds are taxed at 15%, under Section 111A of the Income Tax Act, if the holding period is less than 12 months.
- LTCG (Long-Term Capital Gains) on listed equity shares and mutual funds are taxed at 10% (without indexation) under Section 112A, if the gains exceed ₹1 lakh in a financial year and the holding period is than 12 months.
However, if a portion of your income remains within the
basic exemption limit, then the unused limit can be used to reduce
these taxable capital gains.
💡 What Does Adjusting Against Basic Exemption Limit Mean?
If the total gross income without short-term or long-term capital gains falls below the exemption limit, then the remaining amount of the limit may be used to offset such capital gains. Hence, such an adjustment will reduce the taxable capital gains and hence help reduce or avoid the tax liability.
Let’s understand:
-your exemption limit is ₹2.5 lakh (for individuals below 60 under the old regime).
-If your income from other sources (like salary or business) is Rs. 2 lakh, then you still have ₹50,000 of unused exemption.
-You can apply this ₹50,000 to your capital gains.
-So, if you had an LTCG of ₹1 lakh, you would only pay tax on ₹50,000.
-Similarly, for STCG under Section 111A, the ₹50,000 offset would reduce the taxable portion, and only the remainder would be taxed at 15%.
This provision is especially beneficial for senior citizens who have retired: those who hardly earn regular income or just a very tiny amount but do generate income from long-term investments.
✅ Who Can Avail This Benefit?
There are certain eligibility conditions to use this benefit
effectively:
- Residential
Status: The taxpayer must be a resident individual.
Non-residents (NRI, OCI, etc.) are not allowed to use the basic exemption
limit to adjust capital gains.
- Type
of Income: The benefit applies only to STCG under Section 111A
and LTCG under Section 112A, both of which pertain to
equity-related instruments like listed shares and equity mutual funds.
- Income
Composition: The adjustment can only be done if the other income
(excluding capital gains) is below the exemption threshold, allowing
partial or full usage of the remaining limit.
- Tax
Regime: Both old and new regimes allow this adjustment, but taxpayers
should evaluate which regime is more tax-efficient for their overall
income profile.
🧮 Real-Life Example: Understanding Through Calculation
Let’s consider a practical scenario:
In Case:
- A 45-year-old resident individual
- Total income from other sources: ₹2 lakh
- LTCG from sale of equity shares: ₹1 lakh
- Applicable exemption limit (old regime): ₹2.5 lakh
In this case:
- ₹2 lakh is covered under the exemption limit, leaving ₹50,000 of unused limit
- ₹50,000 of the LTCG can be offset
- So, only ₹50,000 of LTCG is taxable
- Since LTCG is only taxed if it exceeds ₹1 lakh in total gains (as per Section 112A), the remaining ₹50,000 may also fall below the taxable threshold, resulting in zero tax liability on the capital gains
This example illustrates how the unused portion of
the basic exemption can result in tax savings when planned properly.
📌 Important Things to Keep in Mind
- There is no specific order in which you must adjust STCG or LTCG. You may choose the order that results in the lowest tax liability.
- Ensure that the capital gains have been correctly reported in the ITR form, especially in the capital gains schedule.
- Accurate record-keeping of acquisition costs, sale value, and holding periods is crucial, especially when computing capital gains.
- This provision is useful during tax planning for individuals with no regular income, such as homemakers, retirees, or students investing in mutual funds or equities.
- When choosing between the old and new tax regimes, factor in this benefit and assess your overall tax savings accordingly.
📝 Final Words
Through "Can You Save Tax on Capital Gains Using the Basic Exemption Limit?" that Adjustment of capital gains against the basic exemption limit is a valuable tax-saving opportunity available for resident individuals under both regimes. An understanding of how this works, especially vis-a-vis overall income, will help in planning to optimize tax liability and thereby increase post-tax returns from the equity investments. It is advisable either to engage a tax professional or make use of tax computation tools for appropriately assessing your individual financial profile towards a concrete decision.