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2017

Smart Tax Management: Benefit of Shifting

In the world nothing can be said to be certain, except death and taxes
– Benjamin Franklin

  • Quoted above is the famous statement by Benjamin Franklin about the inevitability of taxes in our life. This has increasingly become a reality in India after the Central Government’s efforts to reduce tax evasion and to bring more and more people in the tax net with the help of policy measures and analytics. However, the Income Tax Act has kept some windows open for the people, particular in the middle income group, to reduce their tax burden smartly. These come in the form of deductions, exemptions etc.
  • One such window for us to save tax smartly is “Benefit of Shifting LTCG to Basic Exemption Limit”. The topic under discussion today is related to reducing tax liability arising from Long Term Capital Gain. Let us first understand briefly as what is long term capital gain?

What is Long Term Capital Gain?

  • Any gain or profit is said to be “Capital Gain” when it arises from sale / transfer of a capital asset. Examples of capital assets are land, building, house property, jewellery, securities etc. However, such gain or profit can be long term as well as short term. This depends on the duration for which such assets are held by the owner. Moreover, what time duration can be considered as “Long Term” or “Short Term” also varies from one asset to another. The below table would help us understand this better.
Nature of Asset Period of Holding for “Long Term Capital Asset”
Securities e.g. Listed Shares More than 12 Months
Immovable Property, e.g. House Property More than 24 Months
Movable Property e.g. Gold / Jewellery etc More than 36 Months

Tax Rate for LTCG:

  • Unlike Income Tax slab rates of 5%, 20% and 30% (plus cess and surcharge), which depend on level of income, the LTCG attracts a flat tax rate which is chargeable irrespective of the income level of the assessee. Below table shows tax rates for long term capital gain.
Nature of Asset Tax Rate on “Long Term Capital Asset”
Securities e.g. Listed Shares Nil
Immovable Property, e.g. House Property 20% + 3% E.Cess (with Indexation)
Movable Property e.g. Gold / Jewellery etc 20% + 3% E.Cess (with Indexation)

Drawback of flat tax rate on LTCG to low income assesses:

  • The flat rate of 20% + 3% (E. cess) becomes an additional burden on assesses with lower income level. For example, if Mr. X earns Rs 3,50,000 a year, he has to pay tax at the rate of 5%. However, if he derives any portion of his income from LTCG, he will have to pay flat 20.6% tax on such gain irrespective of his overall income level. To address this issue, the Income Tax Act has a provision wherein the assessee can adjust his income from Long Term Capital Gain against the basic exemption limit.

How to adjust Long Term Capital Gain with Basic Exemption Limit? – Dos and Don’ts:

Following points must be kept in mind while adjusting Long Term Capital Gain with Basic Exemption Limit:
  1. The LTCG can be adjusted against Basic Exemption Limit only when Gross Total Income of the assessee is below basic exemption limit.
  2. The benefit of shifting is available only to Residents. An NRI can not avail this benefit even if his / her gross total income is nil.
  3. Income from all sources must be taken into consideration before one can adjust his / her LTCG with basic exemption limit. Let us understand this with an example:
    Example 1:
    Mr. A is 26 years old resident. Details of his income as given below:
    Sr. No. Source of Income Amount (in Rs.)
    1 Income from Salary 1,80,000
    2 Interest on Fixed Deposit 50,000
    Total 2,30,000
    Mr. A has also booked LTCG of Rs. 50,000 on sales of property during previous year. Determine what amount of LTCG would be Taxable in the hands of Mr. A.
    Wrong way of adjusting LTCG with Basic Exemption Limit:
      Source of Income Amount (in Rs.)
      Income from Salary 1,80,000
      Long Term Capital Gain 50,000
      Interest on Fixed Deposit 50,000
      Total Income 2,80,000
    Less: Basic Exemption Limit (2,50,000)
      Taxable Income 30,000
      Tax Payable (30,000 *5% = 1500) 1500
    Less: Rebate (U/S 87A) (1500)
      Net Tax Liability 0
    Right way of adjusting LTCG with Basic Exemption Limit:
      Source of Income Amount (in Rs.)
      Income from Salary 1,80,000
      Interest on Fixed Deposit 50,000
      Total Income other than LTCG 2,30,000
      Basic Exemption Limit 2,50,000
      Long Term Capital Gain which can be shifted to Basic Exemption Limit 20,000
      Taxable Long Term Capital Gain 30,000
      Net Tax Liability (30000 * 20.6% = 6180) 6180
    From the above example, it is clear that LTCG can be adjusted with basic exemption limit only after taking into consideration all other incomes.
  4. Even though the income of an assessee is zero, the LTCG cannot be adjusted against any tax saving investments covered under Chapter VI-A over and above basic exemption limit.
    Example 2:
    Mr. B is 62 years old resident. Details of his income and investment as given below:
    Sr. No. Particulars Amount (in Rs.)
    1 Income from all sources other than LTCG 0
    2 Investment eligible for deduction U/S 80 1,50,000
    3 Long Term Capital Gain 6,00,000
    In above case, Mr. B can adjust only Rs. 3,00,000 from LTCG against his basic exemption limit. No benefit of investments eligible for deduction U/S 80 can be availed while adjusting Long Term Capital Gain.
    Sr. No. Particulars Amount (in Rs.)
    1 Taxable Long Term Capital Gain 3,00,000
    2 Net Tax Payable (3,00,000 * 20.6% = 61,800) 61,800

            

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