You can adjust your capital gains for any shortfall in basic exemption limit to reduce your income tax outgo. Here's how it works. If you have made long term capital gains worth ₹1 lakh on sale of a debt mutual fund, and your income for the year after claiming all deductions is ₹170,000 (way below the basic exemption limit of ₹2.50 lakh, you can set off the capital gains of ₹80,000 against the shortfall in basic exemption limit. You will have to pay taxes on the remaining ₹20,000 capital gains.
"If you are a resident for the purpose of income tax and your total income as reduced by various deductions is below the exemption limit, you are entitled to set off your short term capital gains (STCG) and long term capital gains (LTCG) on equity investments; and LTCG on investments other than the equity investments, against the short fall in your basic exemption," says Balwant Jain, Chief Editor, ApnaPaisa.
For taxation purpose, capital assets are divided in two categories- equity-oriented investments and other than equity investments. Short term capital gains on equities are taxed at a flat 15%. Long term capital gains over ₹1 lakh, on equity shares or equity-oriented schemes are taxed at 10%. Gains upto ₹1 lakh are tax-free.
The second category is investments or assets other than equities. Short term capital gains on such investments are added to income and taxed at the applicable slab rate. Long term capital gains are taxed at 20% after providing for indexation.
Exemption limit, or the income up to which you are not supposed to pay any tax, for various age groups as allowed by the Income Tax Act is as below:
- upto 60 years of age : ₹2.50 lakh
- between 60 years and 80 years of age: ₹3 lakh
- over 80 years of age: ₹5 lakh
Another example on how the set off works will make the concept more clear.
"For example suppose your taxable income is only 1 lakh and you have short term capital gains on sale of listed equity shares to the tune of ₹5 lakh. Since there is a shortfall in your basic exemption limit to the tune of ₹1.50 lakh, you are entitled to adjust your STCG on equity products to the extent of 1.50 lakh and will have to pay tax on STCG of ₹3.50 lakh only at a flat rate of 15%," explains Balwant Jain.
If a tax payer has made both short term and long term gains during a financial year, she can utilise these gains in any order to be set off against shortfall in basic exemption.
"The law does not prescribe any specific order in which the short fall can be used so taxpayer can chose it the way she wants it to be set off. However the form ITR 2 sets off your long term capital gains on which 20% taxes are payable first and then the STCG on equity shares schemes on which tax is payable @ 15% . Lastly the other LTCG on which 10% tax is payable is adjusted against shortfall in basic exemption. The order of adjustment is logical and beneficial from tax payers’ point of view," says Balwant Jain.
