Short Term Capital Gain & Long Term Capital Gains Tax

02 Oct

Posted by Shyam as Funda Corner

Investing in equity/stock markets is quite risky. And one should have knowledge about the effects of gains/losses and the corporate actions on tax in order to minimize tax and maximize returns. With the markets touching 20,000 levels, everyone wants to be the part of the rally. Meanwhile you should also be aware of Taxation side of buying and selling of stocks.

The investment done in this business is termed as capital asset and hence you either get capital gain or loss.

Short-term capital gain/loss: Termed to business with tenure less than a year. Taxed @ 15%. Liable for short-term and long-term capital gains.
Long-term capital gains/loss: Termed to business greater than a year. Tax free. Liable for long-term capital gain only.

One gets a time period of immediate 8 consecutive years to forward the capital loss.

Affects of corporate actions on taxable income:-

Dividend on shares: The dividend distribution tax is paid by the company.
Bonus shares: Based on the no. of shares a share-holder has, he/she is allotted free shares on the acquisition date. It then depends on date of selling the shares if it’s long-term or short-term.
Rights Issue: When a share-holder is issued shares at a cost less than market price, the shares are termed rights issue and the date of acquisition as date of purchase.
Stock splits: Market value gets affected by face value of shares and therefore on reducing the face value of shares, market value gets changed. Also the splits decide on the tax to be paid on gains. Date of acquisition is the original date when shares are bought.

For example: Mr. X buys 100 shares of Y company @ Rs 500 each on 10^th Jan, 09. Let the face value of the share of Y be Rs 10. Suppose the face value is reduced to Rs 5 on 10^th March, 10 and Mr. X sells his shares @ Rs 305 on 30^th March, 10. The effects will be that because of the split, the no. of shares owned by Mr. Y increases by 100 and the rate by Rs 250. The transaction will be totally tax-free as because the date of acquisition of the shares is Jan, 09 and the date of split is March, 10 making the tenure more than a year and thus a long term capital gain.

Tips on reducing tax

As we know, long term transactions are tax free and so it’s advantageous in case one is getting profit to hold the shares for some more time converting a short term transaction to long-term transaction.
In case one suffered heavy loss, in order to reduce tax he/she should better sell off the shares within a year as long-term losses are not liable on short-term gains.
It may happen that one has sold off his/her shares to get rid of the tax burden before March. One must know that the same stock can be bought after 1^st April to get the position back. Also consider noticing the dates of selling and buying the stocks.