Long-term capital gains are taxed at the special rate of 20%, regardless of tax bracket

Question: I bought a house in 1999 in my hometown for Rs 50,000. The same was sold last year. Taking 2001 as the base year, my indexed long-term capital gain is around Rs. 2.50 lakh. I also have a business income of around Rs. 2.25 million. I have no deductions available under the income tax laws. I understand that since my total income is Rs. 4.75 lakh which is less than Rs. 5 lakh, I do not have to pay tax. Is my understanding correct?

Answer : A resident individual is entitled to avail a tax refund of up to Rs. 12,500 under Section 87A if the total taxable income does not exceed Rs 5 lakh during the year .

Since the slab rate between Rs 2.50 lakh and Rs 5 lakh is 5% only for normal income, the tax payable is also Rs. 12,500 under normal circumstances, and there will be no therefore no tax payable.

However, it is not that there will be no tax payable in any case due to the rebate available under Section 87A, if your income does not exceed Rs.5 lakh. Because long-term capital gains are taxed at a special flat rate of 20%, regardless of your income tax bracket, you’ll have to pay tax if your overall tax liability exceeds the rebate amount of Rs. 12,500 available, and you will have to pay tax on the balance even if your total taxable income does not exceed Rs.5 lakh. So on Rs 2.25 lakh, i.e. income above your basic exemption of Rs. 2.50 lakh, you have a tax liability of Rs. 45,000 at a rate of 20%, against which you will get a rebate of Rs. 12,500 under Section 87A, and have to pay the balance of the tax of Rs. 32,500 with cess. It looks like you didn’t pay any withholding tax, so you’ll also have to pay interest on the remaining tax payable.

Question : My father wants to sell his land, which can fetch around Rs 2 crore. He had inherited the land from my grandfather about 25 years ago. He wants to know how to profit from the sale of the land. Can he put that in a savings account? Will it attract taxes? How can he divide this money among his children?

Answer : Since your father inherited the land, the cost of calculating the capital gain will be deducted from the cost for which the previous owner bought it. So if your grandfather bought it, the cost paid by your grandfather will be considered as your father’s cost. Since the property was purchased before April 1, 2001, your father can take the fair market value (no higher than the stamp duty value) as of April 1, 2001 as his acquisition cost and apply indexation to that fair market value thus adopted. The sale price minus the indexed cost will be your father’s long-term capital gain on which he will have to pay a flat rate of 20% if he does not wish to invest. He can save capital gains by investing the capital gains in another dwelling house and/or in capital gains bonds within a specific time frame.
Yes, he can deposit the money into his savings account. He can also divide the money between his children after paying the taxes.

Balwant Jain is a tax and investment expert
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