Tax planning & To do list before 31st March 2021 - Capital gain tax perspective

Introduction

Many investor started dealing in security market in financial year 2020-21 due to lockdown. They must have dealt with short term, long term, intraday & F&O transactions through the year. There were rapid increase in customer base of broker and trading volume too.

We are in the month of March, Hence, it is extremely important to know the tax implication on stock market transactions and actions to take before 31^st March 2021 as far as tax planning is concerned.

My objective is to brief on existing capital gain tax structure on short term and long term transactions and to give “To-do list before March end” which helps to minimize the tax.

Existing provision of Income tax Act

1. Tax rate provided under Income Tax Act

Simple example:

Short term capital gain: 2,00,000/-  Tax : 30,000/- (2L*15%)

Long term capital gain: 2,00,000/-  Tax : 10,000/- (2L-1L)*10%

2. Set off provision under Income Tax Act

• Short term capital loss can be set off against short term capital gain and long term capital gain
• Long term capital loss can be set off against long term capital gain only

3. Tax on resident individual and HUF

• Both are not required to pay any tax on short term and long term capital gain if their income is below exemption limit. i.e. 2.50 lakhs.

4. Carry forward of loss

• Short term loss and long term loss can be carried forward for next eight assessment year.
• Short term loss can be set off against short term and long term capital gain in any subsequent year and long term capital loss can be set off against long term capital gain in any subsequent year.

5. Due date of filing Income tax return

• Due date for filing Income tax return is 31^st July and 31^st October for Individual and HUF (Non audit case) and others respectively.
• Please remember that short term and long term loss can be carried forward only if one has filed income tax return within prescribed due date.
• Therefore, It is very important to file Income tax return within due date.

To do list before 31^st March 2021

• Book your short term capital loss before March end which will be set off against your existing short term and long term capital gain. Hence  you can save 15% & 10% respectively. You can purchase the same stock after few days if you think that it should be in your portfolio.
• Book your long term capital loss from your portfolio before March end which will be set off against long term capital gain. Hence you can save 10% tax which otherwise you are required to pay.
• There is long term capital gain tax on LTCG exceeding 1 Lakh only as per Section 112A. This 1 Lakh limit is per financial year.

By this you can book your long term capital gain to the tune of Rs 1 Lakh before March end and there will be no tax.  If you want to hold your portfolio for very long term period, you may again buy the same in couple of days.

With this one can use limit of Rs 1 lakh per annum and save future tax which otherwise would be taxable @ 10% in the year of sale. In simple word, you can save tax of Rs. 10,000 every year.