PLAN EXIT OR ENTRY TO REDUCE TAXATION

PLAN EXIT OR ENTRY TO REDUCE TAXATIONWith the stock market zooming as much as 14 per cent in the last two months, many investors would be looking to either book profits or enter. But, before that, they should take taxation into consideration. There are a number of levies on stock market transactions that could reduce your returns. First, there is the capital gains tax. Capital gains is the profit earned when you sell a share at a price higher than the purchase price. For example, if you bought the shares for Rs.100 and sold those for Rs.150, your capital gain was Rs.50. If you sell the shares within a year, this gain attracts a short-term capital gains tax of 15 per cent. However, if you sell after a year, you do not have to pay this tax. Hence, it is advisable to hold shares for at least a year before selling. So, if you subscribe to shares in an initial public offering and sell these on listing (usually within seven days of the issue closing) you will incur a 15 per cent short-term capital gains tax (in case you have made gains). Also, when taking part in buyback or delisting programs, consider how long you have held the shares before surrendering these. Another tax levied is the Securities Transaction Tax (STT). The STT was first introduced in July 2004 to stem the flow of speculative money in the Indian stock markets. It aimed at protecting the small investors. STT is currently charged at 0.025 per cent of the transaction value. For derivatives, it is 0.017 per cent. When you register shares in your name, you will be charged a stamp duty (just like when you buy a house). This is payable when you buy the shares or get these transferred to self. The duty is 0.5 per cent of the value of the shares. Since buying and selling shares is a service offered by brokerages, you have to pay a service tax. At present, it is 10.3 per cent. Any transaction in the share market attracts this tax. Education cess is the surcharge levied by the government on the service tax, to fund basic education in the country and provide meals to school-going children. This is two per cent of the service tax. Amitabh Singh, tax partner, Ernst and Young, says the only way to reduce taxation on stock market transactions is to look out for broking firms that charge lesser brokerage. "Since most taxes are calculated on the basis of the brokerage, look out for those firms that charge less. Most online broking portals charge less, as they see high volumes," adds Singh. Only the capital gains tax is levied on the gains you make. Other taxes are levied on the transaction. The amount of tax-of-tax will also depend on the brokerage being charged. Suresh Sadagopan, a certified financial planner with Ladder7 Financial, says the amount of tax will depend on the quantum of gains. "If one has made a very small amount of gain, he will get badly hit owing to the various taxes he would be obliged to pay. This is because most taxes are levied on the transaction and not the gains," he says. So, how do you show the gains you have made on your shares when filing returns? In case of futures and options trading, you would need to disclose the gain or loss under the head profits or gains from business or profession (read: Normal business income/loss). In cash transactions, if the share is held with the intention of earning dividend, this would be considered trade as usual and not speculative transaction. - www.business-standard.com