Understanding the intricacies of long-term capital gains (LTCG) taxation in India is crucial for individual taxpayers navigating the financial landscape. Here’s a comprehensive overview to help you make informed decisions:
Annual exemption limit:
Individual taxpayers enjoy an annual exemption of up to Rs 1 lakh on LTCG from the sale of equity shares or equity-oriented mutual funds.
To qualify as long-term, the holding period must be 12 months or more.
Specific financial year exemption:
The Rs 1 lakh exemption is specific to the relevant financial year and cannot be carried forward to subsequent years.
Accumulating gains beyond Rs 1 lakh in a financial year will result in income tax liability for that year.
LTCG tax rate and calculation:
Gains exceeding Rs 1 lakh on the sale of listed equity shares or equity-oriented mutual funds held for over 12 months attract a 10% LTCG tax (plus applicable surcharge and cess).
Calculation involves deducting the acquisition cost from the sale price.
Grandfathering clause:
Equities and mutual funds bought before January 31, 2018, follow the grandfathering clause.
The acquisition cost is considered as the price on January 31, 2018, even if purchased earlier.
Tax harvesting strategy:
Tax harvesting involves selling listed equity shares or mutual funds to realize profits within the current year, leveraging the Rs 1 lakh exemption.
After selling, repurchase them in the new financial year, resetting the cost and date of acquisition.
Risks and Considerations:
Date and cost of acquisition change, affecting the holding period for reacquired shares.
If resold within 12 months, gains become short-term, attracting higher taxes.
No rebate under Section 87A for LTCG income on shares and mutual funds.
Cautionary notes:
Exercise caution as tax authorities may scrutinize transactions during tax scrutiny.
Potential loss if prices rise soon after selling and equities need to be repurchased at a higher cost.
Consider brokerage and other costs, as higher charges may impact the effectiveness of the tax harvesting strategy.
Navigating the volatile equity markets requires a strategic approach. While tax harvesting can be a valuable tool, individuals must weigh the risks and benefits, keeping in mind regulatory nuances and associated costs.
