How to save Income Tax by adjusting Long Term Capital Gains against Basic Exemption Limit?

Capital asset typically refers to anything an individual owns for personal or investment purposes. It includes all kinds of property, movable or immovable, tangible intangible, fixed or circulating.

Capital assets are further classified as Financial assets and non-financial assets. Financial assets are intangible and represent the monetary value of a physical item. Stocks (Shares) and equity mutual funds are examples of Financial Assets.

A non-financial asset is an asset with a physical value, such as real estate, Gold ornaments, equipment, machinery etc.,

The profit or gain (if any) that you make on your Capital Assets when you redeem or sell them is referred to as Capital Gains.

It can be a Short Term Capital Gain (STCG) or a Long Term Capital Gain (LTCG) depending upon the ‘Period of Holding’. The tax that is applicable on these profits/gains is known as ‘Capital Gains Tax’.

Related Article : Different Asset classes have different Tax implications – How Returns are taxed?

Besides the capital gains, you can also derive income from salary, pension, interest income on bank deposits, business or profession etc.,

Every Financial Year, you need to declare all such gains and incomes and then have to pay applicable taxes accordingly.

We are all aware on the availability of Basic Exemption Limit of Rs 2.5 lakh, Rs 3 lakh for Senior Citizens and Rs 5 lakh for very Senior Citizens (80+years). So, if you have salary income of say Rs 5 lakh, your income of up to Rs 2.5 lakh is not taxable.

What if you have made only Long Term Capital Gains and you do not have any other sources of income in a Financial Year? Can you still adjust Basic Exemption Limit against LTCG? Do you have to pay Capital Gains tax even if your total income is less than 2.5 Lakh?

Another scenario can be – What if you have LTCG, salary income and also made some tax saving investments? How to calculate Long Term Capital Gains tax? What is the correct method of adjusting LTCG against Basic Exemption Limit and save some taxes? Can you claim 80c Tax Deduction against LTCG? – Let’s discuss

How to adjust Long Term Capital Gains against the Basic Exemption Limit?

The tax rates on your salary or business income and Capital Gains are not uniform. For example : Your salary income is taxable at applicable tax slab rates. Whereas, say your LTCG on sale of property is taxable @ 20% (with indexation).

So, for calculation of tax payable on salary income and capital gains, you need to bifurcate the claiming process of incomes against Basic Exemption limit. Let’s now understand the rules related to this.

Rules related to adjustment of LTCG against Income Tax Basic Exemption Limit

• The basic exemption limit of Rs. 2,50,000 is applicable on your total income (including the Capital gains).
• If the total income including the LTCG is below the basic exemption limit, then there will be no tax liability.
• A resident individual can adjust the LTCG but such adjustment is possible only after making adjustment of other income. In other words, first income other than LTCG is to be adjusted against the exemption limit and then the remaining limit (if any) can be adjusted against LTCG.
• No tax deduction under sections 80C to 80U is allowed from long-term capital gains.

Adjustment of LTCG against the basic exemption limit – Illustrations

Scenario 1 : Basic Exemption Limit | Example:

Mr. Kapoor (resident and age 25 years) is a salaried employee earning a salary of Rs. 1,94,000 per annum. Apart from salary income, he has earned interest on fixed deposit of Rs 6,000. He does not have any other income. What will be his tax liability for the assessment year 2019-20?

For resident individual of age of below 60 years, the basic exemption limit is Rs. 2,50,000. In this case the taxable income of Mr. Kapoor is Rs. 2,00,000 (Rs. 1,94,000 + Rs. 6,000), which is below the basic exemption limit of Rs. 2,50,000, hence, his tax liability will be nil.

Scenario 2 : LTCG, no other income & Exemption Limit | Example:

Mr. Reddy (resident and age 61 years) is a retired person with no income. He has earned LTCG of Rs 3,50,000 on sale of Gold. He does not have any other sources of income. Can he claim Exemption limit on this LTCG and save on Tax?

Yes, he can adjust basic exemption limit of Rs 3 lakh from Rs 3.5 lakh LTCG. He has to pay LTCG tax @20% on Rs 50,000 only.

Scenario 3 : Salary Income, LTCG & Income Tax Exemption Limit | Example :

Smt Suvarna (resident and age 65 years) gets a Pension income of Rs 60,000 and has made an LTCG on sale of property to the tune of Rs 3.5 lakh. What is the correct method to calculate tax liability?

• She has to first adjust her Pension income against Basic Exemption limit.
• The basic exemption limit in this case is Rs. 3,00,000, after adjustment of pension income of Rs. 60,000 from the exemption limit of Rs. 3,00,000 the balance limit available will come to Rs. 2,40,000. The balance of Rs. 2,40,000 will be adjusted against LTCG.
• The remaining limit is Rs 2.4 lakh can be adjusted towards LTCG of Rs 3.5 lakh. Hence, the LTCG tax of 20% is payable on Rs 1.1 lakh only and not on entire Rs 3.5 lakh.

Scenario 4 : LTCG, Tax Saving investment & Basic Exemption Limit | Example :

Mr Shetty (resident and age 40 years) has made an LTCG on sale of Debt Mutual Funds to the tune of Rs 3.5 lakh. He has invested Rs 1.25 lakh in ELSS Mutual Fund. Can he claim tax deduction u/s 80c from Capital Gains? What is the correct method to calculate tax liability?

No tax deduction under sections 80C allowed from long-term capital gains. However, he can claim basic exemption of Rs. 2,50,000 and has to pay LTCG on the remaining Rs. 1,00,000 (Rs 3.5 lakh – Rs 2.5 lakh) @ 20%.

Scenario 5 : Salary Income, LTCG, Tax Saving investment & Basic Exemption Limit | Example :

Miss Sharmila (resident and age 25 years) earned a salary income of Rs 3 lakh, has made an LTCG on sale of Property to the tune of Rs 5 lakh. Se has invested Rs 75,000 in Tax Saving Fixed Deposit. Can she claim tax deduction u/s 80c?

• She can claim Rs 75,000 tax deduction from Salary income. So, her net taxable income becomes Rs 2,25,000 (Rs 3,00,000 – Rs 75,000).
• This income of Rs 2.25 lakh is less than basic exemption limit of Rs 2.5.
• Now since her Total Taxable Income (excluding LTCG) is less than Rs 2.50 Lakh, LTCG would be reduced by the differential amount remaining after claiming the total income under the basic exemption limit (i.e. Rs 25,000 = Rs. 2.50 lakh – Rs 2.25 lakh).
• Thus total LTCG taxable will be only Rs 4.75 Lakh and not Rs 5 Lakh.

Kindly note that Non-Resident Indians can not adjust basic exemption limit against Long Term Capital Gains.

Continue reading :

• How to adjust Short Term Capital Gains against the Basic Exemption Limit? | Tax Rules & Examples
• How to set-off Capital Losses on Mutual Funds, Stocks, Property, Gold, Bonds & Debentures?
• List of all Popular Investment Options in India – Features & Snapshot
• Income Tax Deductions List FY 2019-20 | List of important Income Tax Exemptions for AY 2020-21

(Post first published on : 18-July-2019)