In the last 2 years we have seen a boom in Indian stock market where many new people have entered into stock market and have also made a lot of profit in the stock market due to lot of boom.
However, many people are not aware of the fact as to how to plan and save tax on such capital gain.
Now, let’s first understand that what are the types of income one could earn from share market: Intra day income (where buy and sale is done on same day), gain or loss from F&O transaction (Gain or loss from future and option contracts), short term capital gain and long term capital gain.
In this post we shall talk about short term capital gain and long term capital gain and how you can plan tax on same:
Under Income Tax Act, if any share is sold within 1 year of it’s purchase same will be considered as short term capital asset liable for short term capital gain and taxed under section 111A of the Act at 15%.
If a share is held for more than 1 year it will be considered as Long term capital asset liable for long term capital gain and taxed at 10% under section 112A of the Act. No benefit of indexation is available. However it is important to note here that in case of Long term capital gain no tax needs to be paid on long term capital of upto Rs. 1 lakh in a year.
Now that we have understood about the tax rates on short term and long term capital gain from sale of shares let’s understand how can one plan and save tax on capital gain from shares.
In share market or stock market not all your stocks or shares would always be in profit, there would always be some shares or stocks which would be in losses and thus this method would be useful for people especially small investors who have earned some profits and now don’t know how to plan tax.
Also, if you have already not paid advance tax or not calculated the same, you can read our post on advance tax to understand about advance tax and check you are liable to pay advance tax or not: What is advance tax and who needs to pay it? Advance tax on income from stock market | 4th Installment due on 15th March – Taxontips
So as discussed above not all your stocks would be in profit and hence the best way to utilise the loss of those stock would be to either sell them before 31.03.2022 if you don’t wish to keep them for long term or if you wish to hold those stocks for long term then first sell them and then again purchase them so as to book losses.
As per section 70 of the Income Tax Act short term capital loss can be set off against either short term capital gain or long term capital gain, however long term capital loss can only be set off against long term gain.
Considering the current scenario most of the investors are holding stocks for short term and hence they should sell such short term holding which are in loss, to get the benefit of setting it off against either short term capital gain or long term capital gain and thus converting unrealised loss to realised loss and saving taxes.
Relevant extract of section 70 of Income Tax Act is as under:
“(2) Where the result of the computation made for any assessment year under sections 48 to 55 in respect of any short-term capital asset is a loss, the assessee shall be entitled to have the amount of such loss set off against the income, if any, as arrived at under a similar computation made for the assessment year in respect of any other capital asset.
(3) Where the result of the computation made for any assessment year under sections 48 to 55 in respect of any capital asset (other than a short-term capital asset) is a loss, the assessee shall be entitled to have the amount of such loss set off against the income, if any, as arrived at under a similar computation made for the assessment year in respect of any other capital asset not being a short-term capital asset.”
Thus, this is how losses save you taxes and one should plan his portfolio accordingly and check it 1-2 days before the year ending.
It is important to note here that making investment in scheme or policies mentioned under section 80C or other Chapter VI-A methods won’t save capital gain tax.
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