How selling equities before March 31 can help you save income tax (2024)

Individual taxpayers do not have to pay income tax on long-term capital gains (LTCG) up to Rs 1 lakh earned on the sale of equity shares or equity-oriented mutual funds. Gains from selling of equity shares and equity oriented MFs is considered long-term if it is sold after holding for 12 months or more. However, this exemption is specific to the relevant financial year, and it cannot be carried forward to the next years. So, if you do not sell your holding and continue accumulating gains for a longer period and withdraw a bigger gain, you will need to pay income tax on gains above Rs 1 lakh applicable to that financial year.

"Gains in excess of Rs 1 Lakh on sale of listed equity shares or equity oriented mutual fund held for more than 12 months are subject to long term capital gains (LTCG) tax @10% (plus applicable surcharge and cess)," says Mitesh Jain, Partner, Economic Laws Practice, a law firm.

Also Read: Fixed Deposit: How senior citizens can get tax-free return by investing in tax-saving FDs


How the capital gains tax would be calculated for equity shares and mutual funds

Capital gains taxation is applied by taking out the difference between the sale price and the cost of acquisition. However, the cost of acquisition of equity shares and mutual funds will be calculated differently if it was bought before January 31, 2018. This is because there is a concept of 'grandfathering clause' at play here. Under this clause, if any equity shares or mutual funds are bought before January 31, 2018, then the acquisition price would be taken as the price on January 31, 2018, even if the said share or mutual funds were purchased much earlier.

For example, if an individual purchased a share for Rs 630 in August 2015 and on January 31, 2018, the price of the share was Rs 1,000. Then the cost of acquisition of this share would be Rs 1000 and not Rs 630. So, if the individual sells the share on January 31, 2020, for Rs 1,500, capital gains would be calculated as follows:

Cost of acquisition: Rs 1000

Sale price: Rs 1500
Capital gains: Rs (1500-1000) = Rs 500

"LTCG income would not added to the total income of the individual. As per section 112A, LTCG income exceeding Rs 1 lakh is taxed at a flat rate and balance income (after deductions if any) is taxed as per applicable slab rate of the individual." says CA Aastha Gupta, Partner, S.K.Gulati & Associates, a CA firm.

Also read: Tax demand up to Rs 1 lakh/person waived: Check ITR a/c.

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Here's how to not pay any capital gains tax on equity shares and mutual funds

The mechanism to use is called 'tax harvesting' and it is fully legal and permissible. What an individual needs to do is simply sell their listed equity shares and mutual funds and then buy it back after some days to continue their investment planning.

For example, an individual who has 1,000 shares of a company which he bought at Rs 1,100 per share on March 20, 2019. On March 31, 2023, the share price of this company touched Rs 1,189 and the individual sold them. The long-term capital gains are calculated like this: Rs 1189*1000-1100*1000= Rs 89,000. Since the long-term capital gains amount is less than Rs 1 lakh he does not need to pay any income tax. To continue with his investment financial plan, the individual purchased the same listed equity shares of the company on the next trading day which is on or after April 3, 2023.

"This strategy is legal and technically feasible. It is commonly known as tax harvesting, involves selling shares to realise profits within the current year and take advantage of the Rs 1 lakh exemption. Consequently, the shares can be repurchased after the start of the new financial year, allowing gains up to Rs 1 lakh to become non-taxable for the taxpayer with a revised cost of acquisition and revised date of acquisition. This approach serves to reduce investors' tax obligations over time, all while maintaining the risk profile of their investment portfolio," says Neeraj Agarwala, Partner, Nangia Andersen India, a tax and business consulting group.

However, this option comes with its own share of risks. If an individual is using this method to book profits on their equity investments, then there are certain things to keep in mind.

Things to keep in mind when using tax harvesting to reduce total tax liability

Cost and date of acquisition would change: Tax experts say that since the individual who is using the tax harvesting method is essentially selling their equity investments and buying them back in the new financial year, the cost and date of acquisition would change.

"Tax harvesting should be approached with careful financial planning. It's crucial to consider that the date of acquisition for the reacquired share will be adjusted, and the holding period for the reacquired share will commence from the date of reacquisition," says Agarwala. This means that you will again have to hold it for a minimum of 12 months to enjoy Rs 1 lakh exemption on long-term capital gains and in case you have to sell it early you will need to be prepared to pay higher short-term capital gain taxes.

"So, if an opportunity arises to sell the shares with very good profits within 12 months after reacquisition, any gains from the sale will be considered short-term capital gains, subjecting the taxpayer to a 15% tax on the appreciated value of the shares," says Agarwala.

Tax rebate is not available on LTCG income: Individuals get a tax rebate under section 87A if their total income is below Rs 5 lakh or 7 lakh. "Rebate under Section 87A is not available on the tax liability against LTCG income on listed shares and equity oriented mutual funds under Section 112A," says Anand Bathiya, vice president, Bombay Chartered Accountant Society (BCAS).

Litigations may arise: There is no explicit regulation in India that disallows tax harvesting however experts advise individuals to be cautious about using this method. "It is advisable for individuals to be careful about using tax harvesting method as they could potentially be questioned by the income tax authorities during tax scrutiny if the same stock is sold and bought back just to save on taxes," says chartered accountant Bhavik Gandhi, Head, Operations, Mirae Asset Capital Market.

Opportunity loss might exist: Equity markets are volatile, and the prices of shares fluctuate by the second. There is always a chance that the equities that you sold for capital gain benefit may rise suddenly just after your selling. In this case, you may end up losing the gains and have to repurchase the same equity at a higher price

Impact of brokerage and other costs: Depending upon your stockbroker a brokerage and other statutory charges like stamp duty, security transaction charge, other charges would be charged whenever a listed share is bought or sold. "Tax harvesting method would not work effectively if brokerage and other costs are on the higher side. Hence individuals opting to use tax harvesting method to lower their tax outgo should keep this in mind," says Gandhi.

How selling equities before March 31 can help you save income tax (2024)

FAQs

Is it smart to sell stocks at a loss for tax purposes? ›

Key Takeaways

Realized capital losses from stocks can be used to reduce your tax bill. You can use capital losses to offset capital gains during a tax year, allowing you to remove some income from your tax return.

How do you sell stocks to save taxes? ›

Individual taxpayers do not have to pay income tax on long-term capital gains (LTCG) up to Rs 1 lakh earned on the sale of equity shares or equity-oriented mutual funds. Gains from selling of equity shares and equity oriented MFs is considered long-term if it is sold after holding for 12 months or more.

How to minimize taxes when selling stock? ›

9 Ways to Avoid Capital Gains Taxes on Stocks
  1. Invest for the Long Term. ...
  2. Contribute to Your Retirement Accounts. ...
  3. Pick Your Cost Basis. ...
  4. Lower Your Tax Bracket. ...
  5. Harvest Losses to Offset Gains. ...
  6. Move to a Tax-Friendly State. ...
  7. Donate Stock to Charity. ...
  8. Invest in an Opportunity Zone.
Mar 6, 2024

How much do you get taxed if you sell a stock before a year? ›

Gains you make from selling assets you've held for a year or less are called short-term capital gains, and they generally are taxed at the same rate as your ordinary income, anywhere from 10% to 37%.

Can you write off 100% of stock losses? ›

If you own a stock where the company has declared bankruptcy and the stock has become worthless, you can generally deduct the full amount of your loss on that stock — up to annual IRS limits with the ability to carry excess losses forward to future years.

What is the 6 year rule for capital gains tax? ›

What is the CGT Six-Year Rule? The capital gains tax property six-year rule allows you to use your property investment as if it was your principal place of residence for up to six years whilst you rent it out.

How do I sell shares and avoid capital gains tax? ›

13 ways to pay less CGT
  1. 1) Use your CGT allowance. ...
  2. 2) Give money or assets to your spouse or civil partner. ...
  3. 3) Don't forget your losses. ...
  4. 4) Deduct your costs. ...
  5. 5) Increase your pension contributions. ...
  6. 6) Use your ISA allowance – each year. ...
  7. 7) Try Bed and ISA. ...
  8. 8) Donate to charity.

Does selling stock hurt your tax return? ›

Selling a stock for profit locks in "realized gains," which will be taxed. However, you won't be taxed anything if you sell stock at a loss. In fact, it may even help your tax situation — this is a strategy known as tax-loss harvesting.

Can you sell stock and reinvest to avoid taxes? ›

With some investments, you can reinvest proceeds to avoid capital gains, but for stock owned in regular taxable accounts, no such provision applies, and you'll pay capital gains taxes according to how long you held your investment.

What is a simple trick for avoiding capital gains tax? ›

An easy and impactful way to reduce your capital gains taxes is to use tax-advantaged accounts. Retirement accounts such as 401(k) plans, and individual retirement accounts offer tax-deferred investment. You don't pay income or capital gains taxes at all on the assets in the account.

How to avoid capital gains tax over 65? ›

Utilize Tax-Advantaged Accounts: Tax-advantaged retirement accounts, such as 401(k)s, Charitable Remainder Trusts, or IRAs, can help seniors reduce their capital gains taxes. Money invested in these accounts grows tax-free, and withdrawals are not taxed until they are taken out in retirement.

At what age do you not pay capital gains? ›

Capital Gains Tax for People Over 65. For individuals over 65, capital gains tax applies at 0% for long-term gains on assets held over a year and 15% for short-term gains under a year. Despite age, the IRS determines tax based on asset sale profits, with no special breaks for those 65 and older.

Are you taxed twice when you sell stock? ›

Double taxation refers to income tax being paid twice on the same source of income. This can occur when income is taxed at both the corporate level and the personal level, as in the case of stock dividends.

When to sell stocks at a gain? ›

How long should you hold? Here's a specific rule to help boost your prospects for long-term stock investing success: Once your stock has broken out, take most of your profits when they reach 20% to 25%. If market conditions are choppy and decent gains are hard to come by, then you could exit the entire position.

Why are capital losses limited to $3,000? ›

The $3,000 loss limit is the amount that can be offset against ordinary income. Above $3,000 is where things can get complicated.

Why is capital loss limited to $3,000? ›

The $3,000 loss limit is the amount that can be offset against ordinary income. Above $3,000 is where things can get complicated.

Can I save tax on stock market loss? ›

How you can save Tax on Market Losses? You can try to reduce tax liability even at the time of a loss. One has to book capital gains that are considered short-term investments. Analysis has to be made if the asset under question has to be sold or kept.

When should you cut your losses and sell a stock? ›

A good rule of thumb that most investors live by is to cut losses anytime a stock falls 5-8% below the price you purchased it at. The most important thing to remember is that the earlier you accept a loss, the more money you'll save in the long run.

How much capital gains can I offset with losses? ›

If your capital losses exceed your capital gains, the amount of the excess loss that you can claim to lower your income is the lesser of $3,000 ($1,500 if married filing separately) or your total net loss shown on line 16 of Schedule D (Form 1040), Capital Gains and Losses.

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