As
an Investor, you often need to be aware of the Income Tax provision on
capital gains tax liability arising on your Investment Decisions.
Awareness of these provisions would certainly help in minimizing the tax
incidence on capital gains and hence effectively increasing your return
on Investments. I will briefly explain you the concept and things to
remember in a simple manner.
When does Tax liability arise ?
1. When you Sale shares, you attract capital gain tax based on period of your holding.
A share if sold within 1 Year of buying will be taxed as Short Term
Capital Gain. If you sale a share after holding it for more than 1 year,
it will be treated as Long Term Capital Gain. For example if you bought
100 shares of Company “X” on 15th March,2008 and sold them on 1st
March,2009 the period of your holding is less than 1 year and hence it
would qualify for Short Term Capital Gain. If you sell these shares
after 15th March,2009, i.e., after holding it for more than 1 year, it
will qualify as Long Term Capital Gain.
2. Short Term capital gain is taxable @15% while Long Term Capital Gain on Sale of Shares is Tax free ! Yes,
the tax liability on Short Term and Long Term Capital gains makes it
important for you to plan your moves carefully. In the above example,
suppose you bought 100 shares of company ‘X” @ Rs.100 and Sold the same
@Rs.150. If you sell these shares before 15th March , you will be liable
to pay short term capital gain tax on the profit earned. In this case
your tax liability will be Rs.750 i.e 15% of ( 100*(150-100)). However,
you would have sold your shares on or after 15th March,2009, the profit
earned (Rs, 5000 in the above example) would be treated as Long term
capital gain and would be Tax free.
3. You are liable to pay tax on Net Short term Capital Gains.
This means that If you have earned Rs. 5000 on trading in Company “X”
and booked a loss of Rs., 3000 on sales of shares of company “Y” (both
should qualify as short term capital transaction), then your tax
liability would be calculated on Rs. 2000 i.e., 15% of Rs. 2000. In
other words, Short term capital gain can be offset by Short Term Capital
Loss. However , you cannot offset a Short Term Capital Gain with Long
Term Capital Loss. capital gain
4. Bonus Shares
should be considered at Nil Cost of acquisition while calculating the
gains. the period of holding should be computed from date of issue of
Bonus shares.
5. You can claim cost of acquiring shares such as Brokerage charges, Demat charges while calculating capital gains.
Tax Planning Tips
1.
Whenever you plan to sell a share, make sure to look at period of your
holding. If you are earning profit on a transaction, you may decide to
wait for few more days to convert a short term capital gain to a long
term capital gain and enjoy tax free earnings.
2.
At the end of financial year, say in the month of March, take a stock
of all your holdings and see positions where you can book short term
capital loss to offset short term capital gain that you have earned
during the year. This way you would reduce your capital gain tax
liability for the year. You can again take a position the stock on 1st
April. This way you have saved paying tax on your capital gains for the
year and still holding shares you have sold to book losses and hence
offset the gain. This involves incurring transaction cost on buying and
selling the shares and hence keep this in your mind while calculating
your net gains.
3. If you are incurring huge
loss on a position in any share, and if it is nearing a holding period
of 1 Year, you would be better off to sell the shares as Long term
capital loss cannot be offset with short term capital gain and hence
selling it before 1 year holding period would help you to minimize your
capital gain tax liability.
Short term Capital Gain Tax has been
increased from 10% to 15% with effect from Financial Year 2008-09.
Investors should calculate Short term Capital Gain Tax @15% for their
earning in year 2008-09. To avoid confusion I have updated the post
accordingly.
Someone had a query on treatment of capital gain on split Shares.
When a company splits its shares, the value of the shares also gets
allocated accordingly on the record date. Hence in this case the cost of
these shares also gets proportionately divided. In this case , the
period of holding will continue to be the same as period of holding of
original shares.
For example suppose you bought 100 shares of
company “X” with face value of Rs.10 @Rs. 100 Per share. Suppose the
share is currently trading at Rs. 150. Now if the company announces a
stock split by reducing the face value from Rs. 10 to Rs. 5, you will
now hold 200 shares of the company and on the record date, the stock
exchanges will publish a proportionately reduced price of the share say
Rs. 74 in this case. Since your shareholding has increased from 100 to
200, your cost of acquisition per share has also come down from Rs. 100
to Rs. 50. Now you hold 200 shares of the company at Current price of
Rs. 74. If you sell these shares your capital gain will be calculated as
(200*(74-50). The period of holding will be determined based on the
date of purchase of original shares.
Treatment of Shares related to Rights Issue
If
a company has issued Shares through issue of Rights, the cost of
acquiring these shares would be the actual price paid to acquire the
rights. The period of holding would be counted from date of allotment of
rights.
In case you transfer these rights instead of acquiring
the shares, the cost of acquisition would be treated as “Nil” and the
sale price of the transferred rights would be treated as capital gains.
