Surcharge needs to be calculated separately on capital gains from equity
Enhanced surcharge rates have been waived on capital gains from equity. Current surcharge continues as is
On 20 September, finance minister announced that enhanced surcharge rates introduced in the Finance Bill 2019 will not apply on capital gains from shares, equity-oriented mutual funds and unit of a business trust liable for securities transaction tax; the current surcharge of 10% for income between ₹50 lakh and ₹1 crore and 15% for income over ₹1 crore will continue to apply. However, enhanced surcharge rates will continue to apply on other incomes such as salary, interest, dividend, capital gains from assets like real estate and gold and so on, if applicable. Therefore, while calculating the income tax liability for financial year 2019-20, the tax payer will have to calculate taxes as well as surcharge separately in case total income includes capital gains from equity investments. Let’s understand how much surcharge needs to be paid and how it is calculated.
What is surcharge?
Surcharge is an additional levy over and above the tax amount. It was reintroduced by the United Progressive Alliance (UPA) government in the 2013-14 budget. It was meant only for the assessment year (AY) 2014-15, but was carried over in the interim budget in February 2014, and then again in the July 2014 budget by the National Democratic Alliance (NDA) government.
Over the last few years, surcharge rate has been increased while the threshold limit has been decreased. Initially, surcharge was applicable at the rate of 10% in case the taxable income exceeds ₹1 crore; it was later increased to 12% and then 15% in subsequent years. Threshold limit was also reduced to ₹50 lakh.
After enhancing the surcharge rates further in the last budget, there are now four surcharge rates based on income slabs—10% for those with total taxable income between ₹50 lakh and ₹1 crore, 15% for those with taxable income between ₹1 crore and ₹2 crore, 25% for those with taxable income between ₹2 crore and ₹5 crore and 37% for those with taxable income above ₹5 crore.
As mentioned above, surcharge is charged as per the prescribed rate on the tax payable amount if net taxable income of an assessee exceeds the stipulated threshold limits. To calculate the net taxable income, take the gross total income and deduct the investments and expenses that qualify for deductions and exemptions under various sections of the Income-tax Act. Once you have the net taxable income, calculate the tax payable, and on the amount of tax you are required to pay, calculate the surcharge. For instance, say your total taxable income for FY2019-20 is expected to be ₹1.99 crore. In that case, your tax payable would be ₹57,82,500 on which surcharge would be ₹8,67,375 (15% of ₹57,82,500).
However, in case your total taxable income is expected to be ₹2.25 crore, which includes ₹10 lakh as net long-term capital gains (LTCG) from shares, you will need to calculate tax and surcharge separately on other incomes and LTCG from equity. So, in this case, you will have to calculate tax according to the normal slab rate on ₹2.15 crore ( ₹2.25 crore minus ₹10 lakh), plus 25% surcharge and 4% cess, whereas net LTCG from equity will attract income tax at the rate of 10% and surcharge at the old maximum rate of 15% and cess of 4%—remember, only the enhanced surcharge is waived off. Tax payable on ₹2.15 crore would be ₹62,62,500 plus ₹15,65,625 (surcharge at 25% of ₹62,62,500) plus cess of ₹3,13,125 (4% of ₹62,62,500 plus ₹15,65,625), which is ₹81,41,250.
Tax on net LTCG from equity of ₹10 lakh would be ₹1,00,000 (10% of taxable net LTCG) plus ₹15,000 (surcharge at 15% of ₹1,00,000) and cess of ₹4,600 (4% of ₹1,00,000 plus ₹15,000), making the total ₹1,19,600. Total net tax payable including surcharge and cess would be ₹82,60,850.
But remember, “applicability of surcharge will be calculated based on the total taxable income, including income from capital gains," said Amit Maheshwari, partner, Ashok Maheshwary and Associates, a chartered accountancy firm. That means, even in case where capital gains from equity bring down the total income below a threshold, surcharge will be charge accordingly to the total income. For instance, if total taxable income is ₹2.25 crore, surcharge should be calculated at the rate of 25% even if the income includes capital gains from equity to the tune of ₹50 lakh. Also, applicability of surcharge is subject to marginal relief. It means that the amount of surcharge cannot exceed the net income over and above the threshold limit.