Easy Way to remember Capital Gain Tax Rates

EASY WAY TO REMEMBER CAPITAL GAIN TAX RATES

Many times it’s confusing to determine the applicable tax rate to Capital Gain arises on income during the year. Assesses applies wrong rates due to misconceptions about the rates (10%, 15%, 20%, Nil Rate) applicable to different types of capital gains arises & as a result they have to answer Income Tax Department in further proceedings.

To understand easily, which rates applicable to which capital gain and under which section of Income Tax Act, 1961; let us see simply two basic types of Capital Gains i.e.:

(1)        Long Term Capital Gain

(2)        Short Term Capital Gain

Both the above capital gains so arises may or may not be due to transaction which attracts Securities Transaction Tax (STT). To simplify further let us further divide these capital gains into Capital Gain to which STT applicable and STT not applicable.

LONG TERM CAPITAL GAIN

Here is the picture which represents Long Term Capital Gains with applicable tax rate along with the Sections applicable to each. Long Term Capital gain to which STT is not applicable is also further bifurcated in two areas namely Indexation applicable and Indexation not applicable to remember easily with less efforts.

Section 10(38): If listed equity shares or any units of Equity Oriented Fund are sold and on sale STT is paid, then Long Term Capital Gain is exempt from tax.

Section 112: Tax on Long Term Capital Gains applies to all assessees including Non-Residents @ 20% with indexation benefit in which long term capital assets so transferred are any of following:

1. a security listed in any recognised stock exchange in India or
2. a unit of UTI or Mutual Fund (listed/unlisted) or
3. zero coupan bonds

Where ‘Security’ means Security as per Sec.2(h) of Securities Contract Regulation Act, 1956.

However, as per Finance Act, 2012 in case of Non-resident, tax on Long Term Capital Gain on unlisted securities shall be 10% without applying first proviso and second proviso to Sec.48.

Second Proviso to Sec. 48 : Tax on Long Term Capital Gains applies to all assessees without giving benefit of indexation @ 10%.

SHORT TERM CAPITAL GAIN

Now let us see in the same way Short Term Capital Gains. Here is the picture which represents Short Term Capital Gains with applicable tax rate along with the Section applicable to each. Short Term Capital gain to which STT is not applicable is no further bifurcated in two areas namely Indexation applicable and Indexation not applicable.

Section 111A: Tax on Short Term Capital Gains applies to all assessees including Non-residents @ 10% if they fulfill following conditions:

1. The Gains arise from transfer of short term capital assets
2. Such assets should be an Equity share in a company or a Units of an “Equity Oriented Fund”
3. Transaction of sale is chargeable to STT.

So, above is the easy way to remember Capital Gain Tax Rates. I tried my best to make it simplify. I am also applying above diagram made by me to remember while preparing various Income Tax Returns of clients.

Happy New Year and have a Great Year 2014.

Easy Calculation of Depreciation – Two General Cases

Easy Calculation of Deprecation – Two General Cases

In today’s professional life many software makes the calculation easy on only filling up the figure of purchase and sales or incomes and expenses which makes the client happy in completing his work early and speedily. But hey….the students who studying professional courses… like Chartered Accountancy (CA), Cost and Works Accountants (CWA), Company Secretaries (CS) etc. under their article-ship become used to with ready-made software that made the work fast and ready on time….Don’t do it always. It is benefited for them for a short time span but they should think about it for the actual calculation as it may helpful in case of their exams or in absence of ready-made softwares or in situation of replying notices of income tax authority for cases when calculation of depreciation is necessary, etc.

Many people find it difficult to calculate Depreciation u/s. 32 of the Income Tax Act, 1961. Depreciation calculation makes sometime difficult to understand because we calculate in both way, i.e. in Accounting purpose and in Income Tax purpose. Treatment of depreciation under Income Tax Act, 1961 is simple compare to Accounting.

There are Two types of Depreciation namely – (a) Normal Depreciation and (b) Additional Depreciation (In case of power generating business). Normal Depreciation under section 32 of the Income Tax Act, 1961 is calculated on Written Down Value (WDV) of Block of Assets on the rates prescribed in the Act. Generally, Two Cases may arise:

Case (1) when neither WDV of Block of Assets nor Block of Assets is Zero

&

Case (2) when either WDV of Block of Assets or Block of Assets is Zero

Let see the calculation in easy form to understand instead of going through technical justification of above two Cases.

Case (1) when neither WDV of Block of Assets nor Block of Assets is Zero

In each of the above cases, Depreciation is calculated on WDV of Block of Assets, as we discussed earlier, calculating depreciation is easy especially on when assets purchased during the year is put to use for more than 180 days but confusion comes when such assets are put to use for less than 180 days. Let us see treatment of charging Depreciation in two situations comes under Case 1:

So you can see that there is NO CAPITAL GAIN / LOSS arises in Situation 1 & 2 of Case 1.

Case (2) when either WDV of Block of Assets or Block of Assets is Zero

In Case (2), whether or not the assets purchased during the year for less than 180 days Capital Gain/Loss u/s. 50 will arise in case where any assets sold during the year

and  value of assets sold is more than the WDV of Block of Assets ( Not all assets are sold)

OR

when all the assets of the Block is sold BUT assets sold at value less than WDV of Block of Assets

In such case the Block of Assets ceases to exist (Block of Assets is Zero) or WDV of Block of Assets becomes Nil (Zero).

Here, there is NO DEPRECATION to be charged in Situation 1 & 2 of Case (2).

Dear friends, while doing calculation of depreciation for illustrations or for client, consider that there are only two situations arise for depreciation as we discussed above.