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PAY LESS STCG AFTER BUDGET -HOW

RAJAN GUPTA 
on 26 March 2008

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Dear friends ,




As you know in budget 2008 ,our Finance Minister has increased the short term capital gain on share transaction, on which securities transaction tax (STT) has been paid, from 10% to 15 % .This has been done under section 111A for indian resident From Assessment year 2009-10.



what was 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 10% 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 balnce 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 10% 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
What is current position after amendment

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 300000.But this the fact as most of the person who shows income from STCG has income less than 300000 as big fishes show income of sale purchase of shares as business Income.



What are the option available after Budget

First option:

TREAT income from shares as Business Income instead of short term capital gain. while we discuss under which head income from share to be taken ,as you all know 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:


  1. as your income will be covered under business you can charge /book various expenses which has been incurred to earn share income which can not be done in short term capital gain .In some cases it will be beneficial for person whos income will be more than 300000 rs also.
  2. You can set off loss from business of shares from any other head except salary.
  3. You can also claim benefit of deduction under chapter VI also.
  4. STT paid will be allowed as Expenditure.

dis advantages;



  1. you have to prepare proper books of accounts if the income from shares is more than 120000 rs in a year or gross trunover is more than 1000000 in any of the proceeding proceeding three years.
  2. if trunover is morethan 4000000 than audit is required.

Second option

Sell the equity share out of market /off the market than section 111A will not apply



Benefit:



  1. your short term capital gain will be treated as income and income tax will be calculated as it it required to calculated in on any other income. means STCG will be part of total income and normal slab rate will be applied.
  2. You can also claim benefit of deduction under chapter VI also.
  3. No STT is required to paid as transaction is to be done off market.

disadvantages:



  1. generally off market transaction creates doubt in ITO mind ,but it is done on the same rate as were in stock exchange than it can be proved easily.
  2. other expenses as compare to business income is not allowed under STGC.
  3. 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 Assessement year=2009-10



Income from salary= 200000


Income from shares as Short term capital gain (STT PAID 5000)=150000


saving U/s 80C =50000



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



tax on STGC 150000@ 15 %=22500


other income


(200000-50000)=150000=nil tax



total tax payable=22500





Case 2:if we take as a Business Income (and lets suppose there are exp which can not be shown in STCG as 20000)



Income from salary=200000


Income from business=(150000-20000 other exp-5000stt)=125000


Gross income=325000


less :saving=50000


net taxable income=275000


tax payable=12500




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



short term capital gain=150000


salary= 200000


GT=350000


less :saving=50000


taxable income=300000


tax due=15000


and saving of stt =5000 rs so effective tax =10000



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



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Category Income Tax
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RAJAN GUPTA 

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