BL Research Bureau

To douse the raging fire in the equity markets, Finance Minister Nirmala Sitharaman announced a partial rollback of the enhanced surcharge that she had introduced in the Budget in July.

In the July Budget, the surcharge on tax had been increased from 15 per cent to 25 per cent for those whose taxable income is more than ₹ 2 crore and up to ₹ 5 crore. And for those whose taxable income is more than ₹ 5 crore, the surcharge had been increased from 15 per cent to 37 per cent. This change applied to individuals, HUF, association of persons, the body of individuals and artificial judicial persons.

Read also: Will the removal of surcharge on FPI capital gains help stock market?

As per the announcement last Friday, this enhanced surcharge will not be applicable on long/short term capital gains arising from the transfer of equity shares/units referred to in section 111A and 112A respectively of the Income Tax Act.

What this means is that, as an investor, you will not have to pay the enhanced surcharge (25 per cent or 37 per cent) on gains made on the sale of equity mutual fund units and listed equity shares. Note that the original surcharge (15 per cent) continues even now; only the enhancement in the surcharge has been withdrawn. Also, this benefit of the withdrawal of the enhanced surcharge is applicable only on capital gains made on the sale of equity mutual funds/listed shares. The enhanced surcharge will continue on other capital gains, including on sale of unlisted equity shares and debt instruments. Besides, the enhanced surcharge will continue on other sources of income such as salaries, income from house property, business income and other sources.

Read more: Enhanced surcharge withdrawal to be applicable on F&O segment also for FPI

Here’s how the tax calculation will now be done. First, your total taxable income will be calculated adding up all sources of income, including capital gains on equity mutual funds and listed equity shares. If this total taxable income exceeds the specified thresholds (₹ 2 crore and ₹ 5 crore), then the original surcharge (15 per cent) will apply on the tax on capital gains on equity mutual funds and listed equity shares, and the enhanced surcharge (25 per cent or 37 per cent) will apply on the tax on the remaining income.

Say, your total taxable income is ₹ 2.5 crore, made up of salary of ₹ 2.2 crore, short-term capital gains on listed equity shares of ₹ 15 lakhs and long-term capital gains on listed equity shares of ₹ 15 lakhs. As the taxable income exceeds the threshold of ₹ 2 crore, an enhanced surcharge of 25 per cent will apply to the tax on salary income of ₹ 2.2 crore, but on the tax on the short-term capital gains and long-term, only the original surcharge of 15 per cent will apply. Now, your total tax liability will be about ₹ 87.85 lakh. Before the rollback of the enhanced surcharge, it would have been about ₹ 88.24 lakh. That’s a benefit of about ₹ 39,000.

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