Monday, March 7, 2011

Understanding Tax Implications to plan your Equity Investments:

Now with the financial year 2010-11 coming to a close, some of us would naturally wonder about the tax implications on our transactions this year.
This POST is actually intended to enable a clear understanding on the capital gains tax and how it is computed. So here we bring our "Tax Primer" series for you.
While in this first Tax Primer, we will talk about capital gains taxes and what are the applicable taxes on your transaction this financial year, in the second we will discuss 'short term capital gains tax' in detail.
Now, there are broadly two types of capital gains taxes in Securities transactions.
Short term capital gains tax: If the holding period of the stock is less than 12 months
then the gains attract a tax rate of 15%
Long term capital gains tax: If the holding period of the stock is more than 12 months
then the gains do not attract any tax
Let's take a look at an example which will explain the capital gains taxes in details.
Let us say Mr. Sharma has purchased securities A and B both on April 11, 2010 for a total price of 1,00,000 each. As on February 20, 2011, value of his investments is as follows:
In stock A, Mr. Sharma has profit of 30,000 and in stock B, Mr. Sharma has a loss of 50,000. Now he has the following 4 options to choose from taxation perspective:
Scenario Outcome
Scenario 1 He can hold both stocks for more than 12 months; in anticipation of price appreciation No long term capital gains tax
Scenario 2 He can book profit in stock A and hold stock B which is in loss On the profit position in stock A he pays short term capital gains tax of 15%
Scenario 3 He can sell stock A; book profits and sell stock B; book losses Profit of 30,000 in stock A - Loss of 50,000 in stock B = Net Loss of 20,00. This loss can be carried forward for 8 years. No short term capital gain tax on profits
Scenario 4 Hold stock A for more than 12 months and book losses in stock B No long term capital gains tax in stock A and short term capital loss of 50,000. This loss of 50,000 can be carried forward for 8 years.
So take a look at your portfolio and understand the possibilities of leveraging any potential capital gain/loss scenario for your benefit in consultation with your Tax Advisor. 

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