By Amitabh Tiwari & K Shankar
Stock markets are up 50% from lows in March 2020. For the past two weeks the BSE Sensex has been hovering in the 38,000-39,000 band with some experts suggesting taking money off the table.
We are not suggesting in any way whether you should stay invested or sell, but if you decide to sell some shares in your portfolio, we will help you understand the capital gains tax impact of such an action.
Capital gains is the quantum of money made over and above the acquisition cost. Simply put, it is the difference between acquisition cost and sale proceeds of the asset, in this case listed equity shares, done through stock exchanges.
If the sale proceeds are greater than the acquisition cost, then the individual has gained from the transaction. If the sale proceeds are lesser than the acquisition cost, then the individual has incurred a loss.
From the Income tax perspective, it is important to determine whether the gain/loss is of a short term or a long term nature as the rates and treatment of it is different.
Depending on the number of calendar months (and not financial year) between the purchase and sale transactions, the capital gain/loss is categorized under Short-Term Capital Gain/Loss (STCG/L) or Long-Term Capital Gain/Loss (LTCG/L).
Short-Term Capital Gain/Loss is applicable for those transactions which have been executed within 12 calendar months (1 year) of purchase and if the asset is sold after 12 months of holding then it results in Long-Term Capital Gain/Loss.
Short-term capital gain is taxed at 15%, while Long-term capital gain is taxed at 10%. LTCG was introduced with effect from April 1, 2018. Before that, all Long-Term Capital Gains were exempt from tax.
For example, let’s say I bought 10 shares of company XYZ for Rs 10,000 on 1st April, 2020 and sold all of them on 14th Sept, 2020 for Rs 12,500. As I am selling within 12 months, this is classified as STCG. My capital gains tax in this case is Rs 375 (Rs 2,500 x 15%).
In the above example, suppose I had bought these shares on 1st April, 2019. As I am selling after 12 months of holding period, this is classified as LTCG. My capital gains tax in this case is Rs 250 (Rs 2,500 x 10%).
In the above example, suppose I had bought these shares on 1st April, 2017. As I bought these shares prior to the LTCG kicking in (i.e., 1st April 2018), am I exempt from paying tax? The answer is no.
In such cases, the acquisition cost of shares is higher than the price at which one bought the shares or the market price as on January 31, 2018. Why Jan 31, 2018? The Union Budget was announced on Feb 1, 2018 and tax on LTCG was introduced on that day.
Now let’s suppose the market value of the shares I bought on 1st April, 2017 for Rs 10,000 was Rs 11,000 on Jan 31, 2018. In this case the cost of acquisition will be considered as Rs 11,000. My long term capital gains is Rs 1,500 and the tax in this case is Rs 150 (Rs 1,500 x 10%).
In the above example, if the market price on Jan 31, 2018 is Rs 9,000, then Rs 10,000 will be considered as the cost of acquisition, long term capital gains will be Rs 2,500 and tax will be Rs 250 (Rs 2,500 x 10%).
The following table encapsulates the extent and type of capital gains under different scenarios:
What if I incur losses while selling the shares. The entire losses incurred, whether short term or long term, can be offset against gains made during the financial year. Suppose in all the above examples, I sell the shares for Rs 9,000 then my losses under different scenarios would be as follows:
Investors can offset and adjust their capital losses with gains. STCL can be offset against both STCG as well as LTCG, while LTCL can be offset only against LTCG.
If one does not have either or enough LTCG or STCG to offset losses in the current year, then both LTCL and STCL can be carried forward over the next 8 financial years. Carry forward option means losses can be offset against LTCG / STCG, as the case may be, over the next 8 financial years.
Now let’s understand the offset clause through a few examples. Suppose I have 4 shares and this is the gain/loss made during the year, my tax liability and carry forward losses under different scenarios is presented below:
Long term capital gain up to Rs 1 lakh in a financial year is exempt from tax.
Cess and surcharge are payable over and above the tax rates. These rates are applicable for current financial year (2020-21) and these might change depending upon the announcements in the forthcoming budgets.
STCG /LTCG taxes are of self assessment in nature and need to be paid while filing returns, subject to advance tax rules.
The computation of tax for other asset classes / transactions like real estate, bonds, MFs, unlisted securities, off-market transactions are different.
Amitabh Tiwari is a former corporate and investment banker turned political commentator and strategist. He tweets @politicalbaaba.
K Shankar is a MBA in finance with over 2 decades of experience in equity research and financial analysis.