Save Short Term Capital gain Tax

Ratan Deep Saxena (Asstt Manager (Accounts & Finance)) (2998 Points)

21 April 2010

Tax on Short term capital Gain(STCG) on share transaction, on which securities transaction tax (STT) has been paid, is applicable at flat 15 % rate.This has been done under section 111A for Indian resident.In case of individualtax rate from 160000-500000 is Just 10 % whereas under section 111A person has to pay tax on STCG @ flat 15 % .In this post we are discussing method to reduce thetax rate back to 10% .so this article is beneficial for individual /HUF, who has income between 160000-500000 in Fy 2010-11 and most of it or some part fromShort Term capital gain from shares /securities covered under section 111A.

Conditions in section 111A
As per section 111A

if a person's total income includes Short term capital gain from transfer equity shares or unit of a equity oriented fund and
STT has paid on transfer

than rate of tax will 15% flat and on other income of the assessee tax will be calculated as if such balance amount is total income of the assessee

however in case of HUF and Individual if assessee balance income is less than the total exemption limit than such short-term capital gains shall be reduced by the amount by which the balance total income as so reduced falls short of the maximum amount which is not chargeable to income-tax and the tax on the balance of such short-term capital gains shall be computed at the rate of 15% per cent.

In this case deduction under chapter VI also available from balance income i.e income without short term capital gain as discussed above
This section is yet beneficial to those who tax rate is more 15 % like companies ,AOP,BOI ,partnership companies and individual and huf who's income is more than 500000.But this the fact as most of the person who shows income from STCG has income less than 500000 as big fishes show income of sale purchase of shares as business Income.

What are the option available to reduce the tax from 15 % to 10%

First option:Treat income from shares as Business Income instead of short term capital gain, There is a thin line between income from share as a business and short term capital gain . If your trading volume is large as compare to your net worth, you can go for it.

benefit:

As your income is covered under business you can charge /book various expenses which has been incurred to earn share income ,the same can not be done inshort term capital gain .
You can set off loss from business of shares from any other head except salary.
You can also claim benefit of deduction under chapter VI also.
STT paid will be allowed as Expenditure.

Dis-advantages;

you have to prepare proper books of accounts, if the income from shares is more than 1,20,000 rs in a year or gross turnover is more than 10,00,000 in any of the proceeding proceeding three years.
if turnover is more than 60,00,000 than audit is required.

Second option

Sell the equity share out of market /off the market or render it to company if there is a buy back offer from the company ,as the stt is not paid,than section 111A will not apply

Benefit:

your short term capital gain from shares is treated as normal STCG income and income tax is to be calculated on normal slab rate .
You can also claim benefit of deduction under chapter VI also like tax saving LIC premium etc .
No STT is required to paid as transaction is to be done off market.

disadvantages:

generally off market transaction creates doubt in ITO mind ,However if it is done on the same rate as applicable in stock exchange on a particular date then it can be proved easily.
Other expenses as compare to business income is not allowed under STGC.
Off market buyer and seller are difficult to find but they are existed.

So in both the above conditions you will save considerable money ,at least five % of tax.

Example

lets take example of a Individual for Assessment year=2011-12

Income from salary= 260000
Income from shares as Short term capital gain (STT PAID 5000)=150000
saving U/s 80C =100000
STT paid =5000
Computer depreciation and electricity exp=10000

Case 1:tax liability if we take income as SHORT TERM CAPITAL GAIN

tax on STGC 150000 @ 15 %=22500
other income
(260000-100000)=160000=nil tax

total tax payable=22500

Case 2:if we take share profit as a Business Income

Income from salary=260000
Income from business=(150000-10000 other exp-5000stt)=135000
Gross income=395000
less :saving 80C=100000
net taxable income=295000
tax payable=13500

Case 3= if we do the transaction off market out of stock exchange

short term capital gain=150000
salary= 260000
GT=410000
less :saving=100000
taxable income=310000
tax due=15000

Tax under various situation(without cess calculation)
case -1=22500
Case -2=13500
Case-3=15000

so net saving of 9000 in case two and 7500 in case three plus cess on these amount.

The increased rate of tax On STCG and generally reduced rates has create a situation where people are encouraged to do share sale purchase off market.