Courts and even tax departments recognize the difference between tax evasion and tax planning. Tax evasion is an illegal activity, bordering even on crime but tax planning is a legitimate way to reduce taxes by taking advantage of proper reading and interpretation of sections of tax laws.
The present broad principles (Law of the Land) regarding tax evasion are outlined by the Honourable Supreme Court in the famous case of Azadi Bachao Andolan in 263 ITT 706. The Court upheld the…
“freedom of the citizen to act in a manner according to his requirements, his wishes in the manner of doing any trade, activity or planning his affairs with circumspection, within the framework of law, unless the same fall in the category of colourable device which may properly be called a device or a dubious method or a subterfuge clothed with apparent dignity.”
The scope of this article is a very narrow one – to show two specific examples of minimizing tax liabilities. We present two methods of legitimate tax planning with examples:
1. Nowadays most modern brokers give you tax Profits and Losses on real time basis. So for the current year FY 24–25, set a reminder to check in March 2025 (i.e. the last month of the FY) your tax position for the year so far.
For example, if it shows that upto March 24, you have made short term capital gains of Rs. 2.5 lakhs. But also there are some shares which, if sold, would result in short term capital losses; then sell them. Suppose it results in losses of Rs. 1 lakhs, now your short term capital gains for the year would be 1.5 lakhs (2.5 lakhs – 1 lakh), you can always buy back the shares sold next day. In 90% cases, difference will not be more than 1.5–2%. See, here you lost maybe 2% but you saved almost 15% capital gains. Further, there are chances that price may even go down and you may actually repurchase at lower rate.
2. Take advantage of the Long Term exemption of Rs. 1 lakhs each year. Suppose you brought certain shares at Rs. 50,000/- and now price is Rs. 2.5 lakhs, if you sell all the shares in 1 year during your need, you will be taxed for entire amount, better to sell part shares each year (even if you do not require the money) such that total long term capital gains is around 80000–90000 in one year. You can buy back the shares within couple of days, if you want. This way, you realise gains and now your purchase price is the higher one which will help you again when you shall sell the shares next time around.
In above example, if A bought shares for Rs. 50,000 in 2018 and sold in 2023, he will pay capital gains on entire 2 lakhs. But if he sold in 2022 part of the shares such that total long term capital gains is below Rs. 1 lakh and rest of the shares are sold in 2023, then he can minimise the long term capital gains.
Conclusion: Minimizing income taxes when selling shares can be achieved through careful and strategic tax planning. By leveraging real-time profit and loss data and taking advantage of long-term capital gains exemptions, investors can legally reduce their tax liabilities. These methods, when applied correctly, ensure compliance with tax laws while optimizing financial outcomes.
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The Direct Taxes Team of Entrecap Business Services invites readers to share their ideas and for any queries, please comment or email us at info@entrecap.in.
Disclaimer: The information presented above addresses a general topic and is intended for informational purposes only. It should not be considered as actionable legal or professional advice. We recommend consulting with qualified professionals for specific advice tailored to your situation. Entrecap Business Services and its Direct Tax Team are not responsible for any actions taken based on the information provided in this article.
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