-Shyam karnani

By Balwant Jain, Chief Editor, Apna Paisa

For taxation purpose, capital assets are are divided in two categories. The first category is listed equity shares or equity-oriented mutual fund schemes. The long term capital gains (LTCG) on this category of assets are taxed at flat rate of 10% after initial exemption of one lakh rupees. Short term capital gains (STCG) in respect of this category is payable at flat rate of 15%.

The second category of capital assets comprise of all assets other than listed equity shares or equity schemes. The STCG on the second category of assets are treated like your regular income. These gains are included in your regular income and are taxed at the slab rate applicable to you. LTCG on such assets are generally taxed at flat rate of 20%.

The limit up to which your income is fully exempt is ₹2.50 lakh for those who are below 60 years and is ₹3 lakh for those who have completed 60 years and yet to complete 80 years. Those who have completed 80 years enjoy higher exemption limit of ₹5 lakh.

In case your you are a resident for the purpose of income tax and your total income as reduced by various deductions is below the exemption limit stated above, you are entitled to set off your STCG and LTCG from equity products and LTCG of second category against the short fall in your basic exemption.

For example suppose your taxable income is only ₹1 lakh and you have STCG on sale of listed equity shares to the tune of ₹5 lakh. Since there is a shortfall in your basic exemption limit to the tune of ₹1.50 lakh, you are entitled to adjust your STCG on equity products to the extent of 1.50 lakh rupees. You will have to pay tax on STCG of ₹3.50 lakh only flat rate of 15%.

The law does not prescribe any specific order in which the short fall can be used so taxpayer can chose it the way he wants it to be set off.

However the form ITR 2 sets off your long term capital gains on which 20% taxes are payable first and then the STCG on equity shares schemes on which tax is payable @ 15% . Lastly the other LTCG on which 10% tax is payable is adjusted against shortfall in basic exemption. The order of adjustment is logical and beneficial from tax payers’ point of view.