With the financial year coming to an end, individuals start taking measures to save tax. Most of the taxpayers are aware of the common tax-saving deductions which they can avail during a financial year. A few of these sections under which an individual can claim deductions are – Section 80C (Investments), Section 80CCD (National Pension Scheme), Section 80D (Medical Insurance), Section 80TTA (Interest Income – Non-Senior Citizen), Section 80TTB (Interest Income – Senior Citizen), and more. However, there is one more way to maximize your tax savings using your equity instruments. Before we reveal that, let’s understand the tax on capital gains from equity.
Taxability of equity instruments
Just like taxes are levied on your business incomes, salaries, and other sources, taxes are levied on gains from equities, derivatives, mutual funds, and debt securities listed on the stock exchange. As an investor/trader, you must know how your income from selling securities is taxed because the long-term capital gains (LTCG) have become taxable from 2018.
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For long-term capital gains
As per Section 112A of the Income Tax Act, 1961, shares and equity-oriented mutual funds are taxed as below:
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- Not taxable up to gains of ₹1 lakh
- 10% tax on gains of more than ₹1 lakh (without indexation benefits)
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For short term capital gains
- As per Section 111A of the Income Tax Act, 1961, 15% tax is applicable for equity and equity-oriented mutual funds.
You can know more about taxation for shareholders by clicking here.
How to reduce your tax liability?
By now, you must have known that the long-term capital gains that arise by selling securities (equities or mutual funds) are not tax-free, you need to plan your long-term capital gains. If you are planning to sell shares that you have held for more than a year, then one of the ways to maximize your tax savings or reduce your tax burden is by selling/redeeming only partial equities/mutual funds. Let’s understand this with an example.
For instance – At the end of the financial year, your net long-term capital gain from equities/mutual funds after setting off all your profits and losses is ₹1,50,000. As per the laws, capital gains up to ₹1,00,000 are exempt from tax which means you have a long-term capital gain that will be taxable at 10% (on the amount exceeding ₹1,00,000) bringing your tax liability to ₹5,000 {10% of (1,50,000-1,00,000 (exemption)}. You can save yourself from this capital gain tax by holding a few of the securities in this financial year from the lot you were planning to sell and sell them in the next financial year. You should sell/redeem only those many shares by which your capital gains booked is up to ₹1,00,000.
In this case, let’s assume your long-term capital gain is from 180 shares (Buy Price – ₹600) with a current market price of ₹1200. In this situation, you should only sell 160* out of these 180 shares before the year ends as the capital gain for these 160 shares is ₹96,000 {(160*1200)-(160*600)} i.e. below ₹1,00,000. This way you will be able to save yourself from the LTCG tax of ₹5,000 for this financial year.
*To arrive at these shares, you will need to calculate capital gains (Selling Price – Purchase Price) for different quantities of shares to make sure that the capital gain booked is below ₹1,00,000.
Please note that the above technique is valid only if you hold your shares for more than a year, otherwise your income from selling those shares will come under short-term capital gains and will be taxed accordingly.
Conclusion
Income tax is unavoidable, but it is always good to use various provisions under the Income Tax Act, 1961 to save your taxes. Apart from these provisions, the technique of selling your partial shares helps reduce your tax liability. So, compute your capital gains today to know whether your income from selling securities is taxable or not and start your tax planning.
