Here's how to calculate tax payable on your capital gains
October, 19th 2016
If you have made capital gains on any transactions e.g. on shares, property, you may have to pay tax on these gains. Read on to know which capital gains are taxable in the hands of the recipient and how to calculate the tax.
Long-term capital gains (LTCG) and short-term capital gains (STCG) are taxed at different rates as per the income tax laws. Further, there are specified cases where these gains are taxed at special rates.
Capital gains tax (CGT) is charged on the gains in the year in which the capital asset is transferred, but the same is to be paid in the year in which the money from transfer is actually received by the assessee.
General rates LTCG: It is taxed at 20.6% (including education cess). You cannot avail any deductions under Chapter VI-A (like deduction under Section 80C, 80D, etc.) from these gains. If you have invested/contributed any amount in tax-saving instruments, then you must claim that amount from your gross income (excluding LTCG). Further, in case your taxable income after availing all the deductions is less than the maximum exempt limit as per slab rates for individuals (which is Rs 2,50,000 for AY 2017-18), then the difference between Rs 2,50,000 and your taxable income (excluding these gains) will be allowed as deduction and you will be charged tax @ 20% of the remaining amount.
For example: You have a gross total income of Rs 3,00,000 ( from sources like, salary, business, interest income, etc.) and you have invested Rs 1,20,000 in tax-saving instruments. Then your total taxable income after claiming deductions would be Rs 1,80,000 which is less than the exemption limit in tax slab (i.e., Rs 2,50,000). You also have LTCG of Rs 10,00,000 from the sale of gold which are to be taxed @ 20% (plus E.C).
Now since your total taxable income (excluding LTCG) is less than Rs 2,50,000, your LTCG chargeable to tax @ 20% would get reduced from Rs 10,00,000 to Rs 9,30,000 (i.e., by the differential amount between Rs 2,50,000 and you total income (excluding LTCG) which is Rs 1,80,000 in this case). Eventually, you will save tax by Rs 14,420 with the help of this information. A person with no other income whatsoever, apart from these capital gains, can save his tax by a maximum of Rs 51,500 (20.6% on Rs 2,50,000) with this information.
STCG: It is taxed at normal slab rates of an individual. We need to add the same to our gross total income and pay accordingly after claiming deductions.
Special rates LTCG: LTCG from the sale of equity shares and equity oriented mutual funds on which Securities Transaction Tax (STT) has been charged on sell transaction are completely exempted from tax, which means that any gains from sale of equity shares held for more than a year are not subject to any kind of tax whatsoever. In a nutshell, the tax rates have been reduced to 0% from 20%.
If you are an NRI, then you have to pay tax @ 10% without giving effect to indexation on your LTCG, instead of paying tax @ 20% after giving effect to indexation. This rate is applicable only if the LTCG arise from sale/transfer of unlisted securities (like shares of a private company).
STCG: Similarly, STCG from the sale of equity shares or equity oriented mutual funds on which STT is charged on sell transaction are taxed at 15.45% (including education cess) instead of your normal slab rates. So if you are an individual who comes in the 10% tax bracket, then you would have to pay more on these gains, but if you fall in the 20% or 30% tax bracket, then this special rate of 15% is beneficial for you.
Also, you cannot avail any deductions under Chapter VI-A (like deduction under Section 80C, 80D, etc.) from these gains. Further, the relaxation of reducing your capital gains amount in case your total taxable income is less than the minimum exemption limit of Rs 2,50,000 is also available in this in the same manner as explained above (in case of general rates - LTCG).
Option to the taxpayer As an individual, you have an option to pay tax @ 10% on your LTCG, instead of 20% with some minor changes in computation methodology. Calculate your LTCG without giving effect to indexation. This means that instead of deducting indexed cost of acquisition (ICOA) and indexed cost of improvement (ICOI), you need to deduct the COA and COI from the sale value.
Now compute tax @ 10% on the newly computed gains. In case the tax computed @ 20% on LTCG (with indexation) is more than the tax computed @ 10% on LTCG (without indexation), then you can pay the latter amount as you LTCG tax.
This option is only available to a resident individual. Further, this option can only be availed if the LTCG is from the sale of a listed security other than an MF unit (like listed bonds, ETFs, etc.) or from the maturity of a zero coupon bond.