How to save tax on Capital Gains from sale of Shares or Mutual Funds?

As per data reported by the Ministry of Finance, India’s Demat account holders more than double in 3 years to 7.38 crore in Oct. 2021. It’s an incontrovertible fact that Investment in Shares and Mutual Funds is the most popular form of Investment. Hence, it is important to understand the taxability of Gains arising from the sale of Shares or Mutual Funds and techniques to save taxes on such gains. The following Tax Rates have been prescribed under Income Tax Act for Capital Gain on the sale of Shares or Mutual Funds –

• Long-term Capital Gain on equity shares listed on the recognized stock exchange or equity-oriented Mutual Funds on which STT is paid is taxed at 10.4% if the gain is above Rs 1 Lakh during the financial year.
• Long-term Capital Gain on shares other than equity shares listed on the recognized stock exchange or Mutual Funds other than equity-oriented Mutual Funds is taxed at 20.8% after availing the benefit of indexation.
• Short-term Capital Gain on equity shares or equity-oriented Mutual Funds are taxed at 15.6%.
• Short-term Capital Gain on shares other than equity shares listed on the recognized stock exchange or Mutual Funds other than equity-oriented Mutual Funds is taxed as per normal slab rates.

Whether the Capital Gain is a Short-term Capital Gain or Long-term Capital Gain will depend upon the period of holding of a particular asset. Generally, a gain arising from the Capital Asset held for a period of 36 months or less is a Short-term Capital Gain, else it’s a Long-term Capital Gain. However, Capital Gain arising from the sale of equity shares or equity-oriented Mutual Funds held for the period of 12 months or less is a Short-term Capital Gain, else it’s a Long-term Capital Gain. As we are the end of the Financial year, a taxpayer may consider the following ways to reduce tax liability arising from Capital Gain on sale of shares or Mutual Funds and incidental interest liability under Section 234B and 234C of Income Tax Act (if the Capital Gains were not considered while discharging Advance Tax for the year).

1. Review your portfolio and check the unrealized losses on Scripts. You may opt for booking the losses on such scripts. The loss arising on the sale of such Scripts can be set off against Capital Gain. It is to be noted that when you book losses on such scripts, you may re-purchase it immediately. It is also to be noted that loss arising from the Sale of Long-term assets can be set off only against Long-term Capital Gains. Long-term Capital loss cannot be set off against Short-term Capital Gain. However, Short-term capital loss can be set off against Short-term Capital Gain or Long-term Capital Gains. In order to save tax, the ultimate financial goals shouldn’t be compromised and the money realized from the sale of such scripts should be immediately reinvested to avoid the risk of price fluctuation. The cost at which you purchase the scripts will be the revised cost of acquisition for the purpose of Capital Gain Taxability.

2. You may consider the possibility of gifting the shares or Mutual Funds to your adult child or parents if their Income is below the exemption limit. The shares or Mutual Funds transferred to adult child/parents as a gift is non-taxable. Further Capital Gains on sale of such shares or Mutual Funds by adult child/parent will not be clubbed in the hands of the transferor. The benefit of Basic Exemption limits available to adult child/Parents can be utilised against Capital Gain on sale of Shares or Mutual Funds. The shares can be transferred online by using the e-DIS facility. You have to submit a Deposit instruction slip to the Demat account Service provider, this slip basically contains the instruction of transfer wherein ISIN, number of shares, and DP name of the person receiving the gift is required to be mentioned.

3. Short-term Capital Gain on sale of shares or mutual funds other than equity shares or equity-oriented Mutual Funds on which STT is not payable, is taxed as per the slab rates. Therefore, if you are thinking to sell such shares or mutual funds, then you may consider the possibility of gifting it to your adult child or parents falling in the tax bracket (say 5/20%) which is lower than your tax bracket, say 30%. The benefit of tax on lower slab rate may be availed at the time of Sale of Shares or Mutual funds by Parents/adult child.

4. If you have an outstanding home loan, then you may use the sale proceeds from the sale of equity shares or Mutual Funds to pay off your home loan and claim an exemption under Section 54F of the Income Tax Act, 1961. However, if you are owning more than one house at the time of repaying your home loan then the exemption under Section 54F will not be available.

5. Long-term Capital Gain on sale of listed equity shares or equity-oriented Mutual Funds is exempt till Rs 1,00,000 for a particular financial year. Hence, you may adopt the method of booking profit and re-investing the amount on such shares or mutual funds in order to utilize the exemption limit of Rs 1,00,000. The amount reinvested will be your revised cost of acquisition for the purpose of Capital Gain taxability. The effective yearly tax savings on utilization of Rs 1,00,000 exemption will be Rs 10400.

Say, Yash purchased 50 equity shares of XYZ Ltd. listed on the recognized stock exchange on 15.04.2019 at the rate of Rs 1000. The Price of XYZ Ltd. on 31.03.2021 is Rs 3000. Now, Yash intends to hold the shares but he wants to reduce the Capital Gain Tax liability on such shares.  Yash, may sell those shares on 31.03.2021 at the rate of Rs 3,000 and immediately re-purchase it at the same rate. The capital gain arising on the sale of shares will be Rs 1,00,000 on which no tax is payable and the revised cost of acquisition for purchase of shares will be Rs 3000 per shares i.e Rs 1,50,000/-.

6. If you are comfortable with the formation of HUF, then you can give a loan to HUF and HUF can invest in Shares or Mutual Funds. The basic exemption limit of HUF can be utilized against Capital Gain on the sale of shares or Mutual Funds. Further, the exemption limit of Rs 1,00,000 can also be utilized for Long-term Capital Gain on the sale of listed equity shares or equity-oriented Mutual Funds. However, before the formation of HUF the taxpayer may assess the legal aspect, Compliance cost vis-à-vis tax advantage.