Taxation - Understanding Tax Implications to plan your Equity Investments - 2011 in NEW TO TRADING & INVESTMENTS? - Now with the financial year 2010-11 coming to a close, some of us would naturally wonder about the tax implications ...
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Understanding Tax Implications to plan your Equity Investments - 2011

  1. Understanding Tax Implications to plan your Equity Investments - 2011

    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.

    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.

    Source : ICICIDIRECT


  2. Understanding tax implications of short term capital gains and losses







    In the previous case, we saw how taxes were calculated on Mr. Sharma's investments in this financial year. Now lets understand the tax implications of Mr. Sharma's short term profits and losses for transactions done this year.

    Scenario 1: Mr. Sharma made both profit and loss in his trades this year
    Let us say Mr. Sharma has purchased two securities:

    Stock A worth 1,00,000 on July 1, 2010. He sold these shares on November 3, 2010 at 1,50,000 and made a profit of 50,000.

    He purchased another Stock B on September 2, 2010 at 2,00,000 and sold them at 1,00,000 on February 2, 2011. Here he has made a loss of 1,00,000.

    His net loss for this period is 50,000 (Loss of 1,00,000 - Profit 50,000). This loss can be carried forward by him for the next 8 years, to offset against any of his future short term capital gain & long term capital gain (on other than exempt).

    Scenario 2: No Profit this year but short term loss
    Mr. Sharma did his first transaction on August 28, 2010 and bought 1,50,000 of shares. On March 15, 2011 they were valued at 1,00,000.



    So take a look at your portfolio and understand the possibilities of leveraging any potential short term capital gain/loss scenario for your benefit in consultation with your Tax Advisor.

    Source: ICICIdirect

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