Under the Smallcase concept, since rebalancing happens weekly or monthly, stocks in your basket are bought and sold in a short term period (i.e. within one year).
Therefore, you pay 15% tax under section 111A on the net gain made during the year. Read on to understand more with a practical situation.
For Example: You bought a small case for Rs. 3000 in August 2021 and it has the following stocks:
100 units of stock A bought for Rs. 25 each = Rs 2500
50 units of stock B bought for Rs. 10 each = Rs 500
Total Rs. 3000.
After one month in September 2021, say rebalancing happens:
100 units of stock A bought for Rs. 25 each = Rs 2500 (retained)
50 units of stock B bought for Rs. 10 each = Rs 500 sold for Rs. 480. Loss booked: Rs. 20
200 units of stock C bought for Rs. 5 each = Rs 1000 (new stocks added to the basket)
Cash flow: You receive Rs. 480 on sale and pay differential of Rs. 520 to make good Rs 1000 with respect to the newly bought stock and rebalance the portfolio.
For tax purpose, for September month, short term capital loss = Rs. 20 (because of sale of Stock B )
After one month say in October 2021, rebalancing happens again:
100 units of stock A bought for Rs. 25 each = Rs 2500 sold for Rs. 3000. Profit booked: Rs. 500
200 units of stock C bought for Rs. 5 each = Rs 1000 (retained)
100 units of stock D bought for Rs. 38 each = Rs. 3800 (new added to the basket)
Cash flow: You receive Rs. 3000 on sale and pay differential of Rs. 800 to make good Rs 3800 with respect to the newly bought stock and rebalance the portfolio.
For tax purpose, for October month, short term capital gain = Rs. 500 (because of sale of Stock A).
This continues… Then as on March 31st 2022, you calculate the net profit or loss for the full year. In the example above, net short term capital gain will be Rs. 500 – Rs. 20 = Rs. 480 which will be taxed at 15% flat rate under section 111A. Therefore, tax liability will be Rs. 72.
To summarise, short term capital gains and losses in all the sell transactions will be accumulated, set off against each other (under section 70 & 71 of the Income-tax Act), and the net gain will be taxed under section 111A at 15%.
Hope this was understandable. Do send in your thoughts in comments. Happy investing!! 🙂
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In case of investment in “small case” who will provide capital gain/loss statement, please advise