How to make tax gains on stock market losses
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B. Karthick
Oct 24, 2008, 6:25:11 AM10/24/08
to Kences1
How to make tax gains on stock market losses
Stock markets have tanked big time, spreading widespread, contagious
panic, pain and gloom the world over.
For equity investors, the pain is, of course, real though not unusual
given that share prices routinely go through bullish and bearish
cycles.
An array of preferential tax treatment on equity investment offers
some balm to investors bloodied by capital losses.
Tax gains on capital losses
Your investments may not always result in capital gains. A loss from
the sale of a long-term capital asset (such as investment in equity or
equity mutual funds held for more than 12 months) can only be set-off
against long-term capital gains.
On the other hand, a loss from short term capital asset is allowed to
be set-off against both short term and long-term capital gains.
How to set-off capital losses
Accordingly, to obtain the maximum benefit one may use the following
order of priority to set-off capital losses:
First, try setting off against short term capital gains not subjected
to securities transaction tax (STT); this will save 30 per cent tax
(since slab rates are attracted);
Second, try setting off against long term capital gains not subjected
to STT and thus save 20% tax.
Last, try setting off against short-term capital gain subjected to
securities transaction tax.
Where capital loss cannot be set-off and tax mitigated during the
ongoing financial year, it can be carried forward to the next year
provided you file a loss return along with your return of income.
In fact, you can carry forward such losses for up to eight years
Zero tax on dividends
Dividends are the distribution of a portion of a company's earnings to
its shareholders in proportion to his / her holding in the company.
The dividend distribution may be in cash or kind entailing the release
of a company's assets.
For this purpose, dividends mean and include:
Distribution of debentures or deposit certificates to shareholders,
and bonus shares to preference shareholders;
Distribution in cash or kind on liquidation of a company to the extent
attributable to accumulated profits of the company;
Distribution by a company to its shareholders on reduction of its
share capital to the extent of accumulated profits of the company.
All such 'dividends' received from a domestic company, whether interim
or final, are exempt from tax in the hands of the investor.
On the other hand, dividend received from an investment in a foreign
company is taxable.
However, an investor can reduce his or her tax burden to some extent
by claiming deduction for related expenses, such as collection
charges, interest paid on money borrowed to purchase the stock, if
any.
Zero tax on long term capital gains from equity
Capital gain is the increased value of any capital asset (in this
case, shares) in relation to its purchase value.
However, this gain is said to be realised only when the investment is
sold, and not otherwise.
On the sale of equity or preference shares, securities listed in stock
exchange, units of Unit Trust of India or units of mutual funds, or
zero coupon bonds, the nature of capital gain (difference between the
sale consideration received and the purchase price plus costs incurred
to realise the proceeds) depends on how long you held the security
concerned.
If you held it for 12 months or less, the sale results in short term
capital gains.
On the other hand, if the security was held for more than 12 months,
its sale results in long term capital gain.
Any short term capital gain arising from the sale of equity shares or
units in a recognised stock exchange, and on which securities
transaction tax is charged, attracts a flat short term capital gain
tax @15%.
However, if the sale is effected through an unrecognised stock
exchange, the short-term capital gain is added to the investor's total
income and attracts tax at the appropriate income tax slab rate
applicable to the investor.
A tax free investment
Long-term capital gains arising from the sale of equity shares are
exempt in the hands of an investor if:
the sale is effected through a recognised stock exchange, and
also when units of equity-oriented funds are sold back to a mutual
fund, and has been charged with securities transaction tax in respect
of such sale.
If the sale is not effected through a recognised stock exchange then
tax @ 10% is levied if the indexation benefit is not availed, and at
the rate of 20% if the benefit of indexation is availed.
Clearly, equity investment held for more than 12 months is more tax
efficient; in fact, it's tax-free! Such exemption is applicable to
bonus shares and right shares also.
Also, since any long term capital gain arising from sale in a
recognised stock exchange is tax exempt, while no such concession
exists in the case of sale in unrecognised stock exchange, it is
obviously wiser to sell your investment through a recognised stock
exchange by paying the very small transaction tax.
Tax implications of rights issue
Right shares are shares issued to its existing shareholders by a
company which opts not to approach the public for raising its required
capital and instead chooses to do so from its existing shareholders.
The tax implications of right shares are the same as in the case of
any other shares which an investor may acquire.
Thus the dividends received on rights shares are tax free in the hands
of an investor.
Hence, in addition to the benefit that an investor typically gets
rights shares at a price lower than the market price, regular
dividends received from them are also currently not taxable.
However, when these shares are sold in the market they attract tax
either as short-term or long-term capital gains depending on the
holding period from the date of allotment of the rights shares to the
date of their sale.
Tax implications of bonus issue
Bonus shares are shares issued by a company to its existing
shareholders without any consideration.
Such shares are issued to increase the liquidity of a stock, or to
adjust its market price resulting by a reduction in the accumulated
profits and an increased share capital.
There is no liability on purchase, no tax liability on dividends
received; however, on sale they attract short term or long term
capital gains depending on the period of holding (date of allotment of
bonus shares to date of sale).
The tax implications are the same as in the case of rights shares
except that the cost of acquisition in the case of bonus shares will
be taken to be nil.
Tax implications of stock split
While a stock split results in an increase in the number of shares in
an investor's hand, the total intrinsic value of the investment,
however, remains unchanged.
The tax implications of dividends received on stock split and the
capital gains are the same as tax implications of original shares,
while the holding period for the purpose is reckoned from the stock's
original date of purchase.
Tax on investments in MFs
In the case of equity oriented mutual funds with growth option, no
dividends are declared, and the tax obligation arises only on sale of
the units.
The capital gains tax arising from the sale may either be:
short-term capital gains taxable at 15% (chargeable to STT), or
long-term capital gains chargeable either at 10% (without benefit of
indexation), or 20% with indexation if the sale is through
unrecognised stock exchange.
In the case of sale through a recognised stock exchange, no tax is
payable on long-term capital gains.
Tax on equity-oriented MFs
In the case of equity-oriented mutual funds with dividend payout
option, any dividends received in the hands of investors are tax
exempt.
The tax implication on capital gains arising on sale of units is the
same as in the case of equity oriented mutual funds with growth
option.
In the case of debt-oriented mutual funds, dividends declared are tax
free in the hands of an investor while long term capital gains are
taxed at 10% without indexation, or 20% with indexation.
In the case of short term capital gains the rate corresponding to the
tax bracket in which the investor falls becomes payable.
B.Karthick
Research Analyst.
Stock markets have tanked big time, spreading widespread, contagious
panic, pain and gloom the world over.
For equity investors, the pain is, of course, real though not unusual
given that share prices routinely go through bullish and bearish
cycles.
An array of preferential tax treatment on equity investment offers
some balm to investors bloodied by capital losses.
Tax gains on capital losses
Your investments may not always result in capital gains. A loss from
the sale of a long-term capital asset (such as investment in equity or
equity mutual funds held for more than 12 months) can only be set-off
against long-term capital gains.
On the other hand, a loss from short term capital asset is allowed to
be set-off against both short term and long-term capital gains.
How to set-off capital losses
Accordingly, to obtain the maximum benefit one may use the following
order of priority to set-off capital losses:
First, try setting off against short term capital gains not subjected
to securities transaction tax (STT); this will save 30 per cent tax
(since slab rates are attracted);
Second, try setting off against long term capital gains not subjected
to STT and thus save 20% tax.
Last, try setting off against short-term capital gain subjected to
securities transaction tax.
Where capital loss cannot be set-off and tax mitigated during the
ongoing financial year, it can be carried forward to the next year
provided you file a loss return along with your return of income.
In fact, you can carry forward such losses for up to eight years
Zero tax on dividends
Dividends are the distribution of a portion of a company's earnings to
its shareholders in proportion to his / her holding in the company.
The dividend distribution may be in cash or kind entailing the release
of a company's assets.
For this purpose, dividends mean and include:
Distribution of debentures or deposit certificates to shareholders,
and bonus shares to preference shareholders;
Distribution in cash or kind on liquidation of a company to the extent
attributable to accumulated profits of the company;
Distribution by a company to its shareholders on reduction of its
share capital to the extent of accumulated profits of the company.
All such 'dividends' received from a domestic company, whether interim
or final, are exempt from tax in the hands of the investor.
On the other hand, dividend received from an investment in a foreign
company is taxable.
However, an investor can reduce his or her tax burden to some extent
by claiming deduction for related expenses, such as collection
charges, interest paid on money borrowed to purchase the stock, if
any.
Zero tax on long term capital gains from equity
Capital gain is the increased value of any capital asset (in this
case, shares) in relation to its purchase value.
However, this gain is said to be realised only when the investment is
sold, and not otherwise.
On the sale of equity or preference shares, securities listed in stock
exchange, units of Unit Trust of India or units of mutual funds, or
zero coupon bonds, the nature of capital gain (difference between the
sale consideration received and the purchase price plus costs incurred
to realise the proceeds) depends on how long you held the security
concerned.
If you held it for 12 months or less, the sale results in short term
capital gains.
On the other hand, if the security was held for more than 12 months,
its sale results in long term capital gain.
Any short term capital gain arising from the sale of equity shares or
units in a recognised stock exchange, and on which securities
transaction tax is charged, attracts a flat short term capital gain
tax @15%.
However, if the sale is effected through an unrecognised stock
exchange, the short-term capital gain is added to the investor's total
income and attracts tax at the appropriate income tax slab rate
applicable to the investor.
A tax free investment
Long-term capital gains arising from the sale of equity shares are
exempt in the hands of an investor if:
the sale is effected through a recognised stock exchange, and
also when units of equity-oriented funds are sold back to a mutual
fund, and has been charged with securities transaction tax in respect
of such sale.
If the sale is not effected through a recognised stock exchange then
tax @ 10% is levied if the indexation benefit is not availed, and at
the rate of 20% if the benefit of indexation is availed.
Clearly, equity investment held for more than 12 months is more tax
efficient; in fact, it's tax-free! Such exemption is applicable to
bonus shares and right shares also.
Also, since any long term capital gain arising from sale in a
recognised stock exchange is tax exempt, while no such concession
exists in the case of sale in unrecognised stock exchange, it is
obviously wiser to sell your investment through a recognised stock
exchange by paying the very small transaction tax.
Tax implications of rights issue
Right shares are shares issued to its existing shareholders by a
company which opts not to approach the public for raising its required
capital and instead chooses to do so from its existing shareholders.
The tax implications of right shares are the same as in the case of
any other shares which an investor may acquire.
Thus the dividends received on rights shares are tax free in the hands
of an investor.
Hence, in addition to the benefit that an investor typically gets
rights shares at a price lower than the market price, regular
dividends received from them are also currently not taxable.
However, when these shares are sold in the market they attract tax
either as short-term or long-term capital gains depending on the
holding period from the date of allotment of the rights shares to the
date of their sale.
Tax implications of bonus issue
Bonus shares are shares issued by a company to its existing
shareholders without any consideration.
Such shares are issued to increase the liquidity of a stock, or to
adjust its market price resulting by a reduction in the accumulated
profits and an increased share capital.
There is no liability on purchase, no tax liability on dividends
received; however, on sale they attract short term or long term
capital gains depending on the period of holding (date of allotment of
bonus shares to date of sale).
The tax implications are the same as in the case of rights shares
except that the cost of acquisition in the case of bonus shares will
be taken to be nil.
Tax implications of stock split
While a stock split results in an increase in the number of shares in
an investor's hand, the total intrinsic value of the investment,
however, remains unchanged.
The tax implications of dividends received on stock split and the
capital gains are the same as tax implications of original shares,
while the holding period for the purpose is reckoned from the stock's
original date of purchase.
Tax on investments in MFs
In the case of equity oriented mutual funds with growth option, no
dividends are declared, and the tax obligation arises only on sale of
the units.
The capital gains tax arising from the sale may either be:
short-term capital gains taxable at 15% (chargeable to STT), or
long-term capital gains chargeable either at 10% (without benefit of
indexation), or 20% with indexation if the sale is through
unrecognised stock exchange.
In the case of sale through a recognised stock exchange, no tax is
payable on long-term capital gains.
Tax on equity-oriented MFs
In the case of equity-oriented mutual funds with dividend payout
option, any dividends received in the hands of investors are tax
exempt.
The tax implication on capital gains arising on sale of units is the
same as in the case of equity oriented mutual funds with growth
option.
In the case of debt-oriented mutual funds, dividends declared are tax
free in the hands of an investor while long term capital gains are
taxed at 10% without indexation, or 20% with indexation.
In the case of short term capital gains the rate corresponding to the
tax bracket in which the investor falls becomes payable.
B.Karthick
Research Analyst.
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