It is that time of the year when many will be pouring over paperwork to compute income from various sources (gross total income) for tax purposes. However, there is one common mistake most of us might make while estimating this number.

It is thought that taxpayers can claim deductions under sections 80C to 80U of the Income-tax Act from gross total income which effectively brings down the net taxable income, and in turn the total tax outgo. Section 80C provides that any investment in or expenditure in specified avenues would be deductible from gross total income up to Rs 1.5 lakh in a financial year. The specified avenues include: investments in Public Provident Fund (PPF), 5-year bank fixed deposits (FDs), equity-linked savings schemes (ELSS) and so on.

"While computing the net taxable income, if the gross total income has: a) Short-term capital gains (STCG) arising out of sale of equity as per section 111A, and b) Long-term capital gains (LTCG) as per section 112, then you cannot claim the deductions under any sections [section 80C to 80U] from these incomes" explains Abhishek Soni, CEO of tax-filing website, tax2win.in.

Section 111A
Any STCG arising out of sale of listed equity shares or units of equity-oriented mutual funds or units of business trusts on a recognised stock exchange where securities transaction tax (STT) is paid, are covered under the section 111A of the Act.

Such STCG are taxed at 15 percent (plus surcharge and cess as applicable). With effect from assessment year 2017-18, any transaction that takes place on a recognised stock exchange located in International Financial Service Centre (IFSC) like Gujarat's GIFT City and consideration paid or payable is in foreign currency comes under the purview of section 111A, even if STT is not paid.

Soni says, "The sub-clause section (2) of the same section (i.e., 111A), states that if the gross total income of an assessee includes any short-term capital gains as mentioned, the deduction under Chapter VI-A shall be allowed from the gross total income as reduced by capital gains."

What this means is that tax breaks available under sections 80C to 80U will not be allowed on the STCG covered under section 111A.

Section 112
Taxation on LTCG covered under section 112 of the Act prohibits an individual from claiming tax breaks under section 80C to 80U on these LTCG. These capital gains are taxed at a rate of 20 per cent after allowing indexation benefit.

Long-term capital gains on the units of debt-oriented mutual funds, listed and unlisted taxable securities such as unlisted shares or listed bonds/debentures where exemption under section 10(38) is not available (like sale of land and building) are covered under this section for purpose of taxation.

A relief is there but...
A relief is given under sections 111A and 112 but only to resident individuals and Hindu Undivided Families (HUFs). The Act allows them to adjust STCG/LTCG against basic exemption limit (depending on the age). However, such adjustment is done only after making adjustments of income from other heads. Non-resident individuals and HUFs cannot adjust their STCG against the basic exemption limits, adds Soni.

Let us take the example of Mr A, a 25-year-old resident Indian who earns an annual salary of Rs 2.1 lakh. He has sold equity shares of ABC Ltd (listed on the Bombay Stock Exchange, STT paid) where his STCG amounted to Rs 1 lakh. He has also invested Rs 30,000 in ELSS, which is eligible for deduction under section 80C.

The taxable income here is taxed at 15 percent plus cess at 3 percent. This is because the taxable income is balance of the STCG left after making adjustments against the basic exemption limit. If A did not have any income except for STCG, then even if he has made investments under section 80C, he would not be able to use it to reduce his gross total income.

In Budget 2018, it has been proposed that LTCG on equity and equity-oriented mutual funds will be taxable at the rate of 10 percent if LTCG exceeds Rs 1 lakh in a financial year. A new section 112A has been proposed to be added to the Income Tax Act for this purpose. "The proposed section also states that deductions under sections 80C to 80U will not be allowed for such gains while calculating tax liability," adds Soni.

What you should do
Most of us make tax-saving investments on the basis of our estimated income. Any error while arriving at estimated tax liability can impact your tax outgo at the time of filing income tax returns. Therefore, remember that for tax planning you need to take into account as to which type of tax saving is allowed for which type of income.