Be Tax-Wise When Investing in Stocks to Maximise Gains

(As published in ET Wealth on December 12, 2016)

Short-Term And Long-Term Capital Gains From Stocks

Nearly every investor knows that short-term capital gains from stocks get taxed at 15%, and long-term capital gains are tax-free. But not many investors are aware of the other tax benefits and regulations. For instance, short-term losses from stocks can be adjusted against taxable capital gains. So, if stocks bought less than 12 months ago are in the red, you can sell them to book a loss and then adjust that loss against gains from other instruments such as debt schemes, gold funds, and even physical gold. What’s more, the unadjusted loss from stocks can be carried forward for up to eight financial years. But taxpayers should also know that capital losses can be carried forward only if the tax return has been filed by the due date.

While capital losses can be adjusted only against capital gains, losses in the derivative segment can also be set off against other incomes, including interest and rentals. This is because trading in derivatives (futures and options on stocks, currencies, and commodities) is treated as a non-speculative business. However, no loss can be adjusted against salary income.

Stocks investors familiar with tax rules are able to optimize the returns from their investments. They use corporate actions such as bonus issues and dividends to reduce their tax liability. When bonus shares are issued or after the dividend is paid out, the price of the scrip comes down. Savvy investors hold their stocks long enough to avoid the bonus-stripping and dividend-stripping clauses before offloading them to book losses. However, some experts feel that this tax arbitrage is not a desirable tactic and should be avoided lest the tax authorities raise objections.

Even the most knowledgeable investors need to keep themselves updated with the changes in the tax rules. This year’s Budget has changed the tax rules for dividends from stocks. If the dividend income is over Rs 10 lakh in a financial year, it will attract a tax of 10%. Fortunately, companies announce dividends much in advance, giving investors enough time to make changes in their portfolios. Investors with large holdings should accordingly rejig their portfolios so that their dividend income does not cross the threshold.

No TDS is applicable on short-term or long-term capital gains earned by resident Indians when they sell mutual funds or stocks. However, tax rules are different for NRI investors. There is a 15% TDS on short-term capital gains from shares and mutual funds if the securities transaction tax (STT) has been paid. If no STT has been paid, the TDS rate is higher at 30.9%. NRIs are also subjected to a 10% TDS on long-term gains from shares and mutual funds.

Given the complexity of the tax rules, it may be a good idea to use the services of a qualified tax professional. HNIs will especially find it more cost effective to use a tax professional than wade into these taxation issues on their own.