Wednesday, April 21, 2010

PAY LESS SHORT TERM CAPITAL GAIN -HOW?


on Wednesday, April 21, 2010

Tax on Short term capital Gain(STCG) on share transaction, on which securities transaction tax (STT) has been paid, is applicable at flat  15 % rate.This has been done under section 111A for Indian resident.In case of individual tax rate from 160000-500000 is Just 10 % whereas under section 111A person has to pay tax on STCG @ flat 15 % .In this post we are discussing method to reduce the tax rate back to 10% .so this article is beneficial for individual /HUF, who has income between 160000-500000 in Fy 2010-11 and most of it or some part from Short Term capital gain from shares /securities covered under section 111A.

 Conditions in section 111A

As per section 111A
  • if a person's total income includes Short term capital gain from transfer equity shares or unit of a equity oriented fund and
  • STT has paid on transfer
  • than rate of tax will 15% flat and on other income of the assessee tax will be calculated as if such balance amount is total income of the assessee
  • however in case of HUF and Individual if assessee balance income is less than the total exemption limit than such short-term capital gains shall be reduced by the amount by which the balance total income as so reduced falls short of the maximum amount which is not chargeable to income-tax and the tax on the balance of such short-term capital gains shall be computed at the rate of 15% per cent.
  • In this case deduction under chapter VI also available from balance income i.e income without short term capital gain as discussed above
  • This section is yet beneficial to those who tax rate is more 15 % like companies ,AOP,BOI ,partnership companies and individual and huf who's income is more than 500000.But this the fact as most of the person who shows income from STCG has income less than 500000 as big fishes show income of sale purchase of shares as business Income.

What are the option available to reduce the tax from 15 % to 10%

First option:Treat income from shares as Business Income instead of short term capital gain, There is a thin line between income from share as a business and short term capital gain . If your trading volume is large as compare to your net worth, you can go for it.

benefit:
  1. As your income is covered under business you can charge /book various expenses which has been incurred to earn share income ,the same can not be done in short term capital gain .
  2. You can set off loss from business of shares from any other head except salary.
  3. You can also claim benefit of deduction under chapter VI also.
  4. STT paid will be allowed as Expenditure.
Dis-advantages;
  1. you have to prepare proper books of accounts, if the income from shares is more than 1,20,000 rs in a year or gross turnover is more than 10,00,000 in any of the proceeding proceeding three years.
  2. if turnover is more than 60,00,000 than audit is required.

Second option

Sell the equity share out of market /off the market or render it to company if there is a buy back offer from the company ,as the stt is not paid,than section 111A will not apply

Benefit:
  1. your short term capital gain from shares is treated as normal STCG income and income tax is to be calculated on normal slab rate .
  2. You can also claim benefit of deduction under chapter VI also like tax saving LIC premium etc .
  3. No STT is required to paid as transaction is to be done off market.
disadvantages:
  1. generally off market transaction creates doubt in ITO mind ,However if it is done on the same rate as applicable in stock exchange on a particular date  then it can be proved easily.
  2. Other expenses as compare to business income is not allowed under STGC.
  3. Off market buyer and seller are difficult to find but they are existed.
So in both the above conditions you will save considerable money ,at least five % of tax.

Example

lets take example of a Individual for Assessment year=2011-12

Income from salary= 260000
Income from shares as Short term capital gain (STT PAID 5000)=150000
saving U/s 80C =100000
STT paid =5000
Computer depreciation and electricity exp=10000


Case 1:tax liability if we take income as SHORT TERM CAPITAL GAIN

tax on STGC 150000@ 15 %=22500
other income
(260000-100000)=160000=nil tax

total tax payable=22500



Case 2:if we take share profit  as a Business Income

Income from salary=260000
Income from business=(150000-10000 other exp-5000stt)=135000
Gross income=395000
less :saving 80C=100000
net taxable income=295000
tax payable=13500


Case 3= if we do the transaction off market out of stock exchange

short term capital gain=150000
salary= 260000
GT=410000
less :saving=100000
taxable income=310000
tax due=15000

Tax under various situation(without cess calculation)
case -1=22500
Case -2=13500
Case-3=15000

so net saving of 9000 in case two and 7500 in case three plus cess on these amount.

The increased rate of tax On STCG and generally reduced rates has create a situation where people are encouraged to do share sale purchase off market???????????

please comment

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  1. Need some clarity on how to treat the following short term capital gains. Pl confirm

    on shares: I believe section 111A is applicable.
    on equity derivatives: again I believe 111A is applicable as STT si paid
    on commodity derivatives: there is no CTT for last financial year (this assessment year). is 111A applicable or does it have to be treated otherwise and gets added to the income?
    on currency derivatives: same as commodity

    as a follow up question: from this July 1, CTT is being charged on commodity transactions. so will the gain fall under section 111A?

    ReplyDelete
    Replies
    1. On shares yes 111A applicable
      on derivative it is treated as business income and not covered under section 111A . stt paid will be treated as exp.
      On commodity derivative ctt was not applicable in last fy :correct and it will be treated as speculative income
      currency derivative through recognised stock exchange is treated as business income otherwise speculative income

      No , after July 1 , CTT is a payable and on these transaction 111a is not applicable but income will be treated as business income .(earlier it was speculative income)

      Delete
    2. thanks for the clarification.
      sorry, didn't understand the diff between business income and speculative income. how do I treat them when I am filing the tax return? I suppose I can still use ITR-2 to show the gain/loss in all the above cases

      Delete
    3. You have to fill itr-4 ,speculative loss can be set off against only speculative income

      suppose you have profit in stocks f & o and loss in commodities then you have to pay tax on stock F & O an can not set off against commodities loss

      Delete
    4. thanks for the clarification. this brings a new dimention on commodity gains/losses.

      last year as well as this year till jun end, there is no CTT and I have losses. and that was speculative loss.

      now after jul1, I have gains. now that I am paying CTT, thsi is treated as business income.

      cannot I adjust this gain against the earlier loss?

      Delete
    5. Unfortunately, you can not adjust losses before 01.07.2013 with profit on or after 01.07.2013

      Delete
    6. Thanks

      Have one more query. I am now filing ITR4 and showing the derivatives income as business income.
      Last year, I purchased a car costing around 8L in November. I believe I can claim depreciation of the vehicle. How much depreciation can I claim and under which section I need to show it in the ITR? I believe I can show all expenses (car, accessories, taxes, insurance, etc.) as the cost and claim depreciation.

      Delete
    7. If you have used your car in business then you can claim depreciation and other exp.

      Delete
  2. Hello Sir
    last year I have worked in two companies getting a salary of Rs.50K and Rs.140K. plus I have some capital gains - around 40K.

    the first company has not issued me form16 saying that since they haven't deducted any tax, they don't have to issue Form16. I have the Form16 from the second company, but they also haven't deducted any taxes. now how do I file my ITR as I don't have the exact details of the income and the non-taxable components from the first company? This is the first time I am filing my tax return. pl help

    ReplyDelete
    Replies
    1. your total income is 50 +140+40=230 pls provide your saving details like lic premium ,epf, etc

      Delete
    2. I have paid ppf of 20000 and LIC policy u/s 80d of 15000 (for my parents). The problem is I don't know the exact details of the salary from the first company only approx figure of around 48K.

      Delete
    3. you should file return with available figures , No tax is payable by you as your income is less than 200000

      Delete
  3. I have already filed my IT Return, but forgot to deduct the LTA Amount. My company didn't accept my LTA Claim as I have taken only 4 days leave (the company rule says I need to take at least 5 days leave).
    Now can I file a revised return deducting the LTA Amount of 15000/-? Which work sheet I need to use to input this amount in the IT Return (ITR-2)

    Thanks

    ReplyDelete
    Replies
    1. LTA amount can be deducted from income only if it has been reimbursed by your employer and added to your salary income first.
      In brief no impact of LTA on net income.

      In your case LTA is not being paid by employer to you but you have incurred expenses .so You can not claim LTA deduction

      Delete
  4. I couldn't reply to the earlier response, so writing a new one.

    My employer gave me LTA of Rs.50000. Its clearly mentioned in the Form16. He didn't give the Rs.15000 expense as non-taxable. So I need to show it in my ITR to claim the LTA deduction. How can I do that?

    ReplyDelete
    Replies
    1. As per Income tax rules LTA is exempted as per actual expenses . A fixed amount of 15000/- is not provided in rules. So you can deduct as per actual subject to some conditions which are provided under following link

      LTA deduction u/s 10(5)

      Further ,if you wanted to claim deduction in itr then this deduction is to be deducted first from salary then net amount is to be shown in salary column in Income tax return . Separate column is not available in Income tax return

      Delete