The long-term capital gain (LTCG) on listed equities and equity-oriented mutual fund (MF) schemes up to Rs 1 lakh is tax-free, but a taxpayer may end up paying tax as the entire LTCG is added to taxable income to determine the eligibility of getting tax rebate for those in the 5 per cent tax bracket and also to determine the applicability of surcharge for those having around Rs 50 lakh of income.
“As per the section 112A of the Income Tax Act, long term capital gain on sale of listed equity shares and equity-oriented mutual funds in excess of Rs 1 lakh is taxable at 10 per cent. In addition to taxes and education cess, surcharge is applicable as well,” said Saraswathi Kasturirangan, Partner, Deloitte India.
So, when added to the taxable income, even the tax-free part of the LTCG may spoil the prospect of getting the tax rebate up to Rs 12,500 u/s 87A of the Income Tax Act for those who otherwise have taxable income within Rs 5 lakh.
“Hence, if the taxpayer has a total taxable income of Rs 6 lakh including the Rs 1 lakh of LTCG that is exempt, the rebate under 87A is not available since the total income exceeds Rs 5 lakh,” said Kasturirangan.
Similarly, the entire LTCG is added to the aggregate income to determine the applicability of surcharge for a taxpayer having income of around Rs 50 lakh.
“The entire long-term capital gain forms part of taxable income and is considered for applicability of surcharge. However the tax and related surcharge would be computed only on gains in excess of Rs 1 lakh,” said Kasturirangan.
“Surcharge rates are prescribed in the first schedule of the Finance Act every year and depend on total taxable income of the taxpayer. Where the taxable income including long term capital gains as indicated above is more than Rs 50 lakh but less than Rs 1 crore, the applicable surcharge rate is 10 per cent and is 15 per cent where the total income is more than Rs 1 crore but less than Rs 2 crore,” she added.
However, there is some respite for the super-rich taxpayers as the taxable part of LTCG – that is in excess of Rs 1 lakh – is considered to determine the amount of surcharge applicable and the maximum rate of surcharge on LTCG on equities and equity-oriented MF schemes is capped at 15 per cent.
“It is important to note that the surcharge on these long term capital gains is capped to 15 per cent even if total taxable income taxes exceed Rs 2 crore effective from FY 2021-22. Long term capital gain in excess of Rs 1 lakh is taxable and forms part of total taxable income which is considered to determine the applicable surcharge rate,” said Kasturirangan.