As the FY 2020-21 is closing, everyone is busy with tax planning. However, very few can know how equities are taxed in India and how can save income tax with planning by the sale of shares. Following are simply logical steps to save long-term and short-term tax.
Let us understand the first types of capital gains that are taxed inequities. These are,
a.Short term capital gains
b.Long term capital gains.
If an investor is holding shares listed on a recognized stock exchange (NSE, BSE) for more than 12 months, the gain/loss arising from the sale shall be ‘Long’ term. Else, it shall be ‘Short’ term.
Now let see the rates of taxes on these gains.
A. Short-term gains on the above shall be taxed at 15% u/s 111A if STT (Securities Transaction Tax) is paid. Please note that usually, every investor pays STT which is charged at 0.1%, both at the time of buying as well as selling the shares.
Calculation of Short-term capital gain = Sale price(less) Expenses on Sale (less) Purchase price
B. Long-term gains on the above shall be taxed at 10% u/s 112A only on capital gains exceeding Rs. 1 lakh. So, if your long-term gains come at Rs. 3 lakh, then you need to pay Rs. 20,000 (10% of Rs. 2 lakh).
Now, few more important things to note here. Resident Individual/ HUF do not need to pay tax if their income is less than Rs. 2.5 lakh. So, if the gains on equities are less than this limit, one need not pay tax (assuming there is no other income)
Loss from Equity Shares
‘Short’ term loss can be adjusted against both short-term gains (taxed at 15%) as well as long-term gains (taxed at 10%). However, ‘Long’ term loss can be adjusted only against long term gains (taxed at 10%)
So, the very first tax-saving tip here is to book short-term losses on shares. To simplify, sell the short-term shares in loss before 31st March. By doing this, you are actually using that loss to set off against your short-term gains and hence save tax at 15%.
Follow this. Look at your portfolio, there can be few stocks that you bought during the financial year. If it is making a loss, sell them and book the loss on paper at least. Doing this will help you set off against both short-term and long-term gains.
Remember this, if you are convinced that the stock is a great buy even though in loss, you can buy again after a couple of days. But selling once and booking loss is actually helping you save taxes.
Also, if you are late in selling, say if you sell the stock in loss after one year, it will become a long-term loss. So, better to sell them during the FY.
And as discussed earlier, you cannot set off long-term loss against short-term gains (taxed at 15%). You will have to set off it against only long-term gains (taxed at 10% and that too after the exemption of Rs. 1 lakh).
You must book long-term gains on paper every year. Say you have shares that are making you a long-term gain of Rs. 1 lakh, you need not pay tax on this as long-term gains are exempt to the tune of Rs. 1 lakh. So, it is always prudent to book long-term gains every year at least to the tune of Rs. 1 lakh. Remember, this limit of Rs. 1 lakh exemption on long-term capital gains is every financial year.
Another important aspect is filing your income tax return in time. The due date for individual and HUF (non-audit case) is 31st July and for others, it is 31st Oct.
Belated return filing would mean non eligibility for carrying forward the short-term and long-term losses.
Short and Long term capital loss can be carried forward for 8 assessment years. Again, Long term loss can be carried forward to be used against only long-term gains. Whereas, Short term loss can be carried forward to be used against both short and long-term gains.
The losses from intraday trading are tagged as ‘Speculation loss’ and this cannot be set off against the regular short term or long term profits on the sale of shares & vice versa
Securities Transaction Tax (STT)
These STT taxes are applicable to all the transactions done through stock exchanges. Any sale/purchase which happens on a stock exchange is subject to STT. Therefore, these tax implications discussed above are only for shares on which STT is paid.
So in a nutshell,
a. Book short-term loss before 31st March.
b. Book long-term gains to save tax on gains up to Rs. 1 lakh.
c. File the income return on time
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