Tax Planning : Capital Gains on Sale of Shares

taxplanning

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.

Update March 12th : Chinmay has rightly pointed out that 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.

Nitin 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.

46 comments:

Nitin said...

How should Capital gains from Split shares be computed?

Chinmay said...

Short term capital Gains tax is increased to 15% from 1st April 2008.

kavita said...

Hello Sir,
I have income from short term capital gains but it is below my taxable limits. Do I still need to pay capital gain Tax ? My Tax liability on caital gain is coming to Rs. 10000. I don't have other sources of income.

Rajesh Soni said...

Hi Nitin, I have replied to your query thorugh the post updation.

Chinmay : Thanks for pointing it out. I have modified the post accordingly

Rajesh Soni said...

Hi Kavita,
since you would be expemted from tax upto 1.8 Lacs of income (slab applicable for women taxpayers), you would not be liable to pay tax on short term capital gains.

Anonymous said...

Is it possible to declare capital gains in form 16 submissions ?

prateeksha said...

Hello Sir,
Can we carry forward short term capital loss to be set off for future capital gains, if any and whatis the time period till we can caryy it forward. please guide.

Thanks,

Karan Batra (CharteredClub) said...

I have that the proposed new tax code may even tax the Long Term Capital Gains ie tax the shares held for more than 12 months which is exempt under the existing law

Rajesh Soni said...

@Anonymous

Yes you can declare capital gains in Form 16.

Rajesh Soni said...

@prateeksha

Short term cpital loss cannot be carried forward.

Rajesh Soni said...

Yes karan, you are Right.

Shree said...

Hi,

In case of joint holding of shares ow is the liability of each individual calculated ?

prafulla said...

hi
i want to know about bonus shares which are sold after 1 year and new shares aquired in IPO which are sold after i year. In both these cases, no STT has been paid while aquiring shares but it is paid while selling after 1 year. Then is there no tax liability?

My son is a NRI and he is repatriating money from banks which is partially invested into shares. If such shares are sold after 1 year, is IT on long term capital gain nil?

Praful

Anonymous said...

I made some profit after selling some shares that I had just bought. I wanted to know the following :

1)At what rate is the capital gain on shares taxable ? Do the tax slabs in this case also depend on your overall income ?

2)Is there a way to re invest this money into capital gain bonds or any such thing where by I can avoid paying taxes on the above gains ?

idhaya said...

En friend Subhangani ku oru Project thanga pa

Yogesh Kulkarni said...

I wish to know correct (and current) rules of setting off Capital Gains related to Shares and Mutual Funds. I have done breakup of the Capital Gains as rules for 'Equity Oriented' mutual funds are different from 'Debt Oriented' mutual funds

Here is the break-up:

a) This year: Equity Based Mutual Fund Short Term
b) This year: Equity Based Mutual Fund Long Term

c) This year: Debt Based Mutual Fund Short Term
d) This year: Debt Based Mutual Fund Long Term

e) This year: Equity stocks Short Term
f) This year: Equity Stocks Long Term

g) Last year: Equity Based Mutual Fund Short Term
h) Last year: Equity Based Mutual Fund Long Term

i) Last year: Debt Based Mutual Fund Short Term
j) Last year: Debt Based Mutual Fund Long Term

k) Last year: Equity stocks Short Term
l) Last year: Equity Stocks Long Term

------------------------------------------------------------------

I am confused about the rules used for set-off. But following is what I think (which may not be correct)

m) Last Year's Equity Long Term which cannot be carried forward is = h + l (permanent loss)
n) Last Year's Debt Long Term that can be carried forward = j
o) Last Year's Debt Short Term that can be carried forward = i + k

p) This Year's Short Term so far = c + e
q) This Year's Debt Long Term so far = b + d + f(?)

r) Short Term offset = p - o = Taxed? or can be offset with 's'
s) Long Term offset = n + q = Still available for offset

But if 'r + s' is allowed then it is available for offset next year

lakhawat said...

sir,
can we set long term loss againsst short term profit as we have not consider indexation of cost

Anonymous said...

The latest form ITR in its Capital column says that in case you have a ST Capital loss u/S 111A then enter Nil ie meaning that you can not offset it against any other CG loss whether short or long term ????

Pawan said...

Hi,

I have a doubt. Can I add my last year (2008-09) Short term loss with this year's (2009-10) short term Gain. I didn't claim last years Loss in my Tax return for 2008-09.

Thanks.

bhavan said...

I have a doubt on LTCG, how to treat gains on sale of shares bought before 2003 and sold off market (no STT paid).
thanks

mohit said...

Gm, Sir, I wanted to ask that if A Listed Company had enter into an agreement for sell out of its shares, Will Capital Gain Tax will be levied on it??

Mohit

ayshabeegum said...

hi guys,
how is capital gain computed in the case of switch in of shares from one to another and later on the same shares are redeemed during the same year??please help me solve this issue..

InsureInvest said...

Useful article. Thank u. We have created a capital gains tax calculator. It would be great if u could review it and give ur feedback : http://insureinvest.in/income-capital-gains-tax-short-long-term.html

ANIL GAMBHIR said...

Dear sir,

I have suffered short term loss of Rs.10000/- in purchase of physical gold and sale within a period of 15days in Sept-2011. In both the transactions, physical gold was exchanged.
Earlier in August,I have earned short term gain of RS.14500/-on purchase and saleof ETF gold on internet. Can first short term loss of Rs.10000/-can be set off against second gain of Rs14500/-?


ANIL GAMBHIR

PolicyWala said...

Anil - It is possible if you show that you have bought the physical gold and sold it at loss via eGold Method. Otherwise not.

Sunitpinto said...

Hi, Thanks for this informative article. Really gives an excellent insight on Capital Gains. I had one query, its more technical in nature.

For e.g. say I have 100 Shares of Infosys bought more than a year back (say 2008).
Now in 2011 say I buy another 20 shares, please note that the shares are first transferred to the pool account. I sell these shares in two days, but the delivery of the shares goes from the brokers pool account versus my Demat account.
Would this case be liable for short term capital gain? or can it be considered for long term gain.

All delivery based trades...

My understanding is we follow the first in first out approach for capital gain calculation, but in this case as it is technically being sold from the pool account is what puzzles me as to what capital gain category it would fall under

VJ said...

Hello Sir,

I have a query on transfer of shares from one DMAT account to another and its implication on capital gain.

I have 500 shares of say Hindalco in my ShareKhan DMAT account. held for more than one year.

I also have 1500 shares of hindalco in my Indianfo DMAT account of which 500 are held for over one year and 100 held for six moinths.

I sell 1000 shares from Indiainfo account and realise that I will be required to pay STCG tax on 500 shares.

Can I transfer my shares from Sharekhan DMAT to my Indiainfo DMAT to avoid paying STCG since I held those shares for over a year?

Would appreciate a quick reply
Thanks

Anonymous said...

VJ,
In case of multiple demat accounts, the capital gains on sale of shares has to be computed on the basis of the FIFO with reference to the particular account from where the shares are sold. The FIFO method was introduced to bypass the process of determining the cost on one to one basis with the particular DP (depository participant).

Anonymous said...

FIFO system is applied per account individually, not collectively to all demat accounts of the investor

indianist said...

I clearly understood the shares and mutual funds, thanks for the information you are the only site giving a porper information ..... keep it up..

indianist said...

What is share and What is mutual fund? To have a better knowledge on investment, you must know what is difference between shares and mutual funds. Both these financial terms have their own benefits and risks.

capital gains said...

Avoiding Capital Gains tax can be achieved in a number of ways. You can either shelter the entire investment in a tax free environment or you can create a capital loss that is equivalent to your gain; either way, our experts on how to avoid capital gains tax will ensure you find the perfect solution.

Ashok said...

If the shares were bought many years ago either in IPO or from market in physical form and are dematted in July 2013 and sold in Aug 2013, will the Capital gain short term or long term? Is the one year holding calculated from the date of original purchase in physical form or from the date of demat?

Anonymous said...

What if I used the amount from short term capital gain, to buy some property (residential flat).

Still I need to pay 15% tax?

Mukesh Gadhavi said...

hello sir
very good knowledge you provided,now i m invest in stocks bcoz tax free for long term capital gains,,,,,,,please spread this bcoz a normal people doesent know this things

Ratan T said...

Now an Automated tool is available that will compute capital gains for you
excel.rtsoftwares.co.in

Henry Smith said...

Very good Tax Planning tips

Anonymous said...

How should the difference in shares be treated that is arising while calculating capital gains as we use FIFO method. Kindly answer.

Sudeep said...

Assume I have purchased share of a company at three different dates.
Date Qty Price Total
01-Apr-2014 100 10 1000
15-Apr-2014 100 15 1500
30-Apr-2014 100 20 2000

The current market price is Rs. 17. I want to sell 100 shares. For calculating the capital gain, can I decide on the lot from which I sell these shares. so that I can show short term loss if I am able to decide that the shares that I sold is from the one purchased on 30-Apr-2014. Please can you put some light on how it should be calculated.

Epic Research said...

To gain more capital it is important to find out where and when to sale the shares.

Animish Sen said...

Wow! A couple of minutes back I was surfing for some relevant information on Accounting and then this page flashed in front of me. Am glad that I came across this blog specially and Anthony Ashcroft’s page. It was a big helping hand in taking credible references for my Research work based on Accounting and Taxation
http://www.ashcroftanthony.com/

Avinash Dwivedi said...

I appreciate your knowledge!

Thanks for a really nice blog on the tax planning.



Tax Planning

Avinash Dwivedi said...

Thanks for the sharing a valuable blog that will really help to the people who want to Plan and mange their taxes online.

I appreciate your knowledge on the Tax saving, it will really helpful.
Incorporation

Finance Wise Global said...

Actually this is a very useful post, thank you for posting such a valuable posts. Good Luck..!!
RG 146 Training

Ace City said...

Awesome Blog their are many residential project launched in noida extension by various builders, but few projects which are highlighted in noida.Ace City Noida Extension is one of the best project with all features and facility.

Child Insurance said...

Get Online Best Child Insurance Plans at reasonable rates at Insuring India.Compare Child Insurance Policy Online and find cheap Child Investment Plans in india.