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.