Save LTCG Tax on Stocks- Business News

Save LTCG Tax on Stocks

Gains above Rs 1 lakh on shares are taxed. Here is how you can churn the portfolio to pay less

Save LTCG Tax on Stocks
Illustration by Raj Verma

A penny saved is a penny earned. This old adage will sound truer than ever to Indian investors who have had to work extra hard to earn even half-decent returns from equities over the past one year. Since every penny matters, one way for stock investors to earn a little extra is saving the 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. Till 2018, long-term capital gains (LTCG) on shares sold after a year were exempted from tax, but there was a short-term capital gains tax of 15 per cent (on equity investments held for less than a year).

Effective April 1, 2018, 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 withdrawal 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 effected 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.