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Saving Taxes on Long Term Capital Gains

Updated on :  

08 min read.

As the end of the financial year approaches, it is probable that you are thinking of tax saving options on the investments you have made over a period of time. The most common investments being, equity shares, mutual funds, etc. which provide a higher rate of return compared to the traditional fixed deposits investments. With the amendments on taxability of shares/stocks, mutual funds etc brought about in Budget 2018, which seek to impose taxes on Long Term Capital Gains (LTCG) in excess of Rs 1 lakh at the rate of 10%, on sale or redemption as the case may be, after 31 March 2018, a little amount strategic planning will still help you save your taxes.

Scenario 1: Sell on or Before 31 March 2018

LTCG made on shares sold or units redeemed until 31 March 2018 were tax exempt.

Scenario 2: The Rolling Concept

This is for those of you who did not intend selling their shares in the near future but want to ensure minimal tax outgo whenever you sell them. Is this possible? Yes it is.
Let us understand this with the help of the following example:
You have invested in shares worth Rs 2 Lakhs on 1st July 2016 (these shares will become Long Term Capital Assets on 1st July 2017). You want to hold these shares for a longer period of time but also want to save on the taxes you pay. Post these shares becoming, long term assets, whenever you sell them you will be liable to tax at 10% on the LTCG  exceeding Rs 1 lakh, if you sell your shares post 31 March 2018.

However, LTCG made up till 31 January 2018 will not be affected. Only the gains made after that date will be taxed. Here it is pertinent to note, that if the Fair Market Value (FMV) of the investments as on 31st January 2018 is greater than the actual cost of the investment, the FMV on 31st January 2018 will be considered for computing capital gains.

Working of the Rolling Concept:

Step 1: Assuming the value of the shares on 26th March 2018 was Rs 4.90 lakhs and FMV on 31st January 2018 was Rs 4 Lakhs. If you had sold these these shares before 27th March, 2018, LTCG of Rs. 90,000, would have been exempt from tax. Subsequently on 28th March, 2018 you reinvested in the same shares for Rs 4.90Lakhs

Step 2: This process of sale and reinvestment can be resorted to year on year to ensure that you are :

  1. Holding your shares long term i.e. for greater than a year so as to not end up paying Short Term Capital Gains Tax at the rate of 15%
  2. Keeping your LTCG less than Rs 1 lakh or marginally above Rs 1 lakh to ensure a minimal tax outgo.

Illustration

This table is a comparison of how you can save on your tax outgo by resorting to sale and reinvesting year on year as against retaining your shares/ mutual funds for a longer period and sell them after the intended holding period.

Edit
ParticularsSelling and reinvestingContinuous Holding
Sell - 26.03.2018 Reinvest on 27.03.2018Sell - 26.03.2019 Reinvest on 27.03.2019 Sell - 26.03.2020 Reinvest on 27.03.2020Sale in FY 2019-20
Selling Price4,90,0006,50,0008,50,0008,50,000
Cost of Acquisition 4,00,000 (FMV as on 31st January 2018)4,90,0006,50,0004,00,000
Long Term Capital Gain (LTCG)90,0001,60,0002,00,0004,50,000
Tax Liability    
FY 2017-18No Tax - - -
FY 2018-19 - 60,000*10%= 6,000 (Upto Rs. 1L is exempt from tax) - -
FY 2019-2020 - - 1,00,000*10%= 10,000 (Upto Rs. 1L is exempt from tax)3,50,000*10%= 35,000 (Upto Rs. 1L is exempt from tax)
Total Tax Liability16,00035,000

The net tax which can be saved through this tax planning is Rs 19,000 Note: Sale and reinvestment year on year for 3 years will result in additional outgo towards brokerage, STT etc. These have not been considered in the above example If you have a diversified portfolio we can advise you on tax saving options for your long term capital gains.  

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