Benefit of Basic exemption limit is available to Long Term Capital gain (LTCG) on sale of shares

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Benefit of Basic exemption limit is available to Long Term Capital gain (LTCG) on sale of shares

If a person does not have any income other than from sale of shares through stock exchange, then the amount of basic exemption limit can be reduced from the amount of LTCG.

Similarly, if a person has other income (other than from sale of shares through stock exchange) which is below the basic exemption limit then the amount of underutilized basic exemption limit can also be adjusted against the income from share and only the income from share after adjusting underutilized amount of basic exemption limit will be taxable.

In short, if a person has lesser income and the basic exemption limit is not fully utilized then the income of LTCG from Equity shares, Equity oriented mutual fund etc. can be reduced by the amount of underutilized basic exemption limit.

The benefit of the basic exemption limit is available to the amount of Capital Gain income from sale of shares as well. This is very categorically provided in section 112A of the Income Tax Act-1961 which reads as under:

Tax on long-term capital gains in certain cases.

112A. (1) Notwithstanding anything contained in section 112, the tax payable by an assessee on his total income shall be determined in accordance with the provisions of sub-section (2), if—

 (i)  the total income includes any income chargeable under the head “Capital gains”;

(ii)  the capital gains arise from the transfer of a long-term capital asset being an equity share in a company or a unit of an equity oriented fund or a unit of a business trust;

(iii) securities transaction tax under Chapter VII of the Finance (No. 2) Act, 2004 (23 of 2004) has,—

 (a)  in a case where the long-term capital asset is in the nature of an equity share in a company, been paid on acquisition and transfer of such capital asset; or

 (b)  in a case where the long-term capital asset is in the nature of a unit of an equity oriented fund or a unit of a business trust, been paid on transfer of such capital asset.

(2) The tax payable by the assessee on the total income referred to in sub-section (1) shall be the aggregate of—

(i)   the amount of income-tax calculated on such long-term capital gains exceeding one lakh rupees at the rate of ten per cent; and

(ii)  the amount of income-tax payable on the total income as reduced by the amount of long-term capital gains referred to in sub-section (1) as if the total income so reduced were the total income of the assessee:

Provided that in the case of an individual or a Hindu undivided family, being a resident, where the total income as reduced by such long-term capital gains is below the maximum amount which is not chargeable to income-tax, then, the long-term capital gains, for the purposes of clause (i), shall be reduced by the amount by which the total income as so reduced falls short of the maximum amount which is not chargeable to income-tax.

(3) The condition specified in clause (iii) of sub-section (1) shall not apply to a transfer undertaken on a recognised stock exchange located in any International Financial Services Centre and where the consideration for such transfer is received or receivable in foreign currency.

(4) The Central Government may, by notification in the Official Gazette, specify the nature of acquisition in respect of which the provisions of sub-clause (a) of clause (iii) of sub-section (1) shall not apply.

(5) Where the gross total income of an assessee includes any long-term capital gains referred to in sub-section (1), the deduction under Chapter VI-A shall be allowed from the gross total income as reduced by such capital gains.

(6) Where the total income of an assessee includes any long-term capital gains referred to in sub-section (1), the rebate under section 87A shall be allowed from the income-tax on the total income as reduced by tax payable on such capital gains.

Explanation.—For the purposes of this section,—

(a)  “equity oriented fund” means a fund set up under a scheme of a mutual fund specified under clause (23D) of section 10 and,—

 (i)  in a case where the fund invests in the units of another fund which is traded on a recognised stock exchange,—

(A) a minimum of ninety per cent of the total proceeds of such fund is invested in the units of such other fund; and

(B) such other fund also invests a minimum of ninety per cent of its total proceeds in the equity shares of domestic companies listed on a recognised stock exchange; and

 (ii)  in any other case, a minimum of sixty-five per cent of the total proceeds of such fund is invested in the equity shares of domestic companies listed on a recognised stock exchange:

Provided that the percentage of equity shareholding or unit held in respect of the fund, as the case may be, shall be computed with reference to the annual average of the monthly averages of the opening and closing figures;

(b)  “International Financial Services Centre” shall have the meaning assigned to it in clause (q) of section 2 of the Special Economic Zones Act, 2005 (28 of 2005);

(c)  “recognised stock exchange” shall have the meaning assigned to it in clause (ii) of Explanation 1 to clause (5) of section 43.

The proviso to section 112A(2) categorically provides for adjustment of Basic exemption limit against profit from share. This is again reproduced for understanding and analysis:

Provided that in the case of an individual or a Hindu undivided family, being a resident, where the total income as reduced by such long-term capital gains is below the maximum amount which is not chargeable to income-tax, then, the long-term capital gains, for the purposes of clause (i), shall be reduced by the amount by which the total income as so reduced falls short of the maximum amount which is not chargeable to income-tax.

The above proviso is incorporated to offer the benefit of the basic exemption limit to the taxpayers.

Tax Planning via Section 80C,80D, etc

It may be noted that no deduction against Chapter VI-A (section 80C, 80G, 80D, etc) is available against the LTCG. But, the same is available against other income. In short, if the person has other income then it is advisable for person to invest/incur expenditure in the specified mode under Chapter VIA which will reduce the amount of other income and if the income is reduced below basic exemption limit, then the benefit of unutilised basic exemption limit could be used against LTCG.

 

 

 

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