LTCG (Long-term Capital Gain)
10 per
cent tax on equity gains above Rs 1 lakh a year (if the shares are held for one
year or more) that was imposed in the 2018 Union Budget. if you sell shares
after holding them for a year or more, you are liable to pay LTCG tax if your
profits are more than Rs 1 lakh.
"Section 112A levies tax at a flat rate of
10 per cent on long-term gains from sale of shares listed on stock exchanges.
However, tax under this section shall be levied only on gains that exceed Rs 1
lakh," says Naveen Wadhwa, DGM, Taxmann. No indexation benefit is available on transfer of shares. Indexation adjusts the
purchase price for inflation and
lowers the gains and, hence, the tax liability.
Four Tips
1. Tax on LTCG gains up to Rs 1 lakh
on shares held for more than a year is Nil.
2. In case of gain up to Rs 2 lakh,
split in two financial years to keep the gains below
Rs 1 lakh in both years.
3. In case of bigger gains, keep
churning the portfolio by selling when gains reach closer to Rs 1 lakh and then
buying back to raise the acquisition cost and, hence, reduce the LTCG tax.
4. You can also invest the proceeds to
buy a residential property to save the LTCG tax.
Here are some ways to reduce this
outgo.
Hold for Very Long
There are many people who had huge
capital gains before the decision to levy LTCG tax was taken. They have been
given respite to a great extent. "When any new clause or provision is
added, certain persons usually enjoy some relief from complying with the
provisions or clauses, which is known as grandfathering. 'Grandfathered'
persons enjoy such relief owing to the fact that they made the decisions under
the old clause/provisions. In this case, investments made on or before January
31, 2018, are eligible for grandfathering," says Gaurav Mohan, CEO, AMRG
& Associates. The rule exempts gains till January 31, 2018. "The concept
of grandfathering under this provision specifies the method for determination
of cost of acquisition, which is deemed to be higher of the (1) The actual cost
of acquisition of such investments or (2) Lower of fair market value (highest
price quoted on the stock exchange as on January 31, 2018) or sale price,"
says Mohan of AMRG & Associates. What this means is that you will have to
pay no tax on gains made till January 31, 2018, which will be considered as the
date of acquisition of the shares; the gains made will be calculated from this
date onwards.
Set Off Losses
Earlier, when there was no LTCG tax,
investors were not allowed to set off their gains against losses, which are
quite common in stock investing. Setting off reduces gains by the amount of
losses incurred and lowers the tax outgo. "Until Budget 2018, any loss
arising out of transfer of equity shares or units of equity funds was a dead
loss as long-term capital gains arising out of such transfer were exempt from
tax. Now, the benefit of set off and carry forward of losses can be availed in
accordance with the existing provisions of the Income Tax Act, that is, the
loss can be set off against long-term capital gains and unabsorbed losses can
be carried forward for up to eight years, "says Mohan. What this means is
that if you have incurred a long-term capital loss by selling shares, you will
have to pay LTCG tax only if your gains in subsequent eight years exceed this
loss. And this loss can be used to set off profits for as many as eight years.
Stagger Gains If gain is Rs 1-2 lakh:
If your profit is above Rs 1 lakh but
not more than Rs 2 lakh, you can save tax by timing your withdrawal. "If the
end of the financial year is near and one is expecting LTCG of up to Rs 2 lakh
from listed shares, it is advisable to split the sale transactions in two different
financial years," says Wadhwa of Taxmann. You can sell one lot of shares
with Rs 1 lakh gains before March 31 and the remaining after April 1, when the
new financial year begins. The two sales will be in two different financial
years and gains in one year will not go beyond Rs 1 lakh.
When gain is above Rs 2 lakh:
However, if the gains are much higher
than Rs 2 lakh, you cannot save tax by splitting the sale as the third
transaction may come after a gap of one year. This can be risky as market
conditions can change drastically in a year. Worry not. If your anticipated
gain is way higher than Rs 2 lakh, you can follow the strategy of churning the
portfolio at regular intervals. "For investors, who deal with a sizeable
portfolio and whose gains are taxable even after the Rs 1 lakh exemption, it is
advisable to churn the portfolio on a regular basis even if they intend to hold
the shares for the long term," says Mohan. This means they can sell the
shares whenever the capital gain approaches Rs 1 lakh and then repurchase them.
Though this will involve some transaction cost, it will be quite low compared to
the LTCG tax. This way they can keep holding the shares for the long term while
using the Rs 1 lakh exemption window for each financial year.
Buy Residential Property
Another way to save LTCG tax is
investing the proceeds to buy a residential property. "Section 54F of the Income-Tax
Act, 1961, provides for exemption from capital gains from transfer of such
long-term capital asset (any asset other than a residential house). The
provision provides that long-term capital gains shall not be chargeable to tax
if the net sales consideration is invested in acquisition or construction of
residential house property within the prescribed period," says Wadhwa of
Taxmann. One important thing to notice is that it is not only the gains that
need to be invested but the entire proceeds. "The entire sale
consideration arising out of transfer of shares may be invested in purchase or
construction of new residential house property. If the residential house
property is purchased, the same should be affected either one year before or
two years after the date of the transfer. In case of construction, the property
should be built within three years of the date of the transfer. Availing such
provision will eventually help in reducing the tax burden on the investor,"
says Mohan.
------------------------------- The end -------------------------
Thank you,
Chandra Sekhar Reddy
Author and Sole proprietor,
SCR Gallery
Website : https://www.scrgallery.com
Blogger : https://scrgalleryindia.blogspot.com
E-mail : scr@scrgallery.com
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