Long-Term Capital Gains Are Taxed At Special Rate Of 20% Irrespective Of Tax Slab

Question: I bought a house in 1999 in my native place for Rs 50,000. The same was sold last year. Taking 2001 as the base year, my indexed long-term capital gain comes to around Rs. 2.50 lakh. I also have a business income of around Rs. 2.25 lakh. I do not have any deductions available under Income Tax laws. I understand that since my total income is Rs. 4.75 lakh, which is below Rs. 5 lakh, I do not have to pay any tax. Is my understanding correct?

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

 Since the slab rate between Rs 2.50 lakh and Rs 5 lakh is 5 per cent only for normal income, the tax liability is also Rs. 12,500 in normal circumstances, and hence there will be no tax liability. 

However, it is not that there will not be any tax liability in all cases due to the rebate available under Section 87A, if your income does not exceed Rs.5 lakh. Since long-term capital gains are taxed at a special flat rate of 20 per cent, irrespective of your income tax slab, you will have to pay tax in case your overall tax liability exceeds the amount of rebate of Rs.12,500 available, and you will have to pay balance tax even if your total taxable income does not exceed Rs.5 lakh. So on Rs 2.25 lakh, i.e., income over your basic exemption of Rs. 2.50 lakh, you have a tax liability of Rs. 45,000 at a rate of 20 per cent, against which you will get a rebate of Rs. 12,500 under section 87A, and will have to pay the balance tax of Rs. 32,500 with cess. It seems you did not pay advance tax, so you will also have to pay interest on the balance tax liability.
 
Question : My father wants to sell his land, which can fetch around Rs 2 crore. He had inherited the land from my grandfather around 25 years ago. He wants to know how to get money from the sale of the land. Can he put this in a savings account? Will that attract tax? How can he distribute this money among his children?

 Answer : Since your father has inherited the land, the cost for computing the capital gains shall be taken from the cost for which the previous owner had purchased it. So in case, your grandfather bought it, the cost paid by your grandfather will be taken as your father`s cost. Since the property was bought before April 1, 2001, your father can take the fair market value (not higher than stamp duty value) as on April 1, 2001 as his cost of acquisition, and apply indexation on such fair market value so adopted. The sale price as reduced by the indexed cost shall be the long-term capital gains of your father on which he has to pay flat 20 per cent if he does not wish to invest. He can save capital gains by investing the capital gains in another residential house and/or in capital gain bonds within specified time limits.
Yes, he can deposit the money in his savings account. He can also distribute the money among his children after paying taxes.
 
Balwant Jain is a tax and investment expert
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