HOW TO SAVE TAX BEFORE 31 MARCH 2022
As the FY 21-22 is closing, every one is busy in tax planning. However, very few can know how equities are taxed in India and how can save income tax with planning by sale of shares. Following are simple logical steps to save long term and short term tax.
1. Let us understand first types of capital gains that are taxed in equities. These are
- Short term capital gains
- Long term capital gains.
2. If an investor is holding shares listed on a recognized stock exchange (NSE, BSE) for more than 12 months, the gain/loss arising from the sale shall be ‘Long’ term. Else, it shall be ‘Short’ term.
3. Now let see the rates of taxes on these gains.
A. Short term gains on the above shall be taxed at 15% u/s 111A if STT (Securities Transaction Tax) is paid. Please note that usually every investor pays STT which is charged at 0.1%, both at the time of buying as well as selling the shares.
B. Long term gains on the above shall be taxed at 10% u/s 112A only on capital gains exceeding Rs. 1 lakh. So, if your long term gains come at Rs. 3 lakh, then you need to pay Rs. 20,000 (10% of Rs. 2 lakh).
4. Now, few more important things to note here. Resident Individual/ HUF do not need to pay tax if their income is less than Rs. 2.5 lakh. So, if the gains on equities are less than this limit, one need not pay tax (assuming there is no other income)
5. ‘Short’ term loss can be adjusted against both short term gains (taxed at 15%) as well as long term gains (taxed at 10%). However, ‘Long’ term loss can be adjusted only against long term gains (taxed at 10%)
6. So, the very first tax saving tip here is to book short term loss on shares. To simplify, sell the short term shares in loss before 31st March. By doing this, you are actually using that loss to set off against your short term gains and hence save tax at 15%.
7. Follow this. Look at your portfolio, there can be few stocks which you bought during the financial year. If it is making loss, sell them and book the loss on paper at least. Doing this will help you set off it against both short term and long term gains.
8. Remember this, if you are convinced that the stock is a great buy even though in loss, you can buy again after a couple of days. But selling once and booking loss is actually helping you save taxes.
9. Also, if you are late in selling, say if you sell the stock in loss after one year, it will become long term loss. So, better to sell them during the FY.
10. And as discussed earlier, you cannot set off long term loss against short term gains (taxed at 15%). You will have to set off it against only long term gains (taxed at 10% and that too after the exemption of Rs. 1 lakh).
