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Monday, January 21, 2013

What is Capital Gains Tax?

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Three more days and the financial year will come to an end. As you wrap up your tax investments, it is time to take stock of capital gains tax. A capital gains tax (CGT) is a tax charged on any profit earned from the sale of real estate, stocks, bonds, mutual funds etc. Capital gains tax can be categorised as short-term or long-term capital gains tax. An investor earns short-term capital gain on equity instruments and mutual funds if the tenure of the investment is up to one year. The tenure is less than three years on real-estate investment.


Long-term capital gain is applicable for real estate if the tenure of the in-vestment is more than three years. However, gains on listed stocks or equity-oriented mutual funds are exempt from income tax. However, if you have not paid the security transaction tax (STT) at the time of sale of the shares (applicable in case of a share buy-back by the company or sale in an open offer, an off market sale when you sell the shares directly to another investor), then you will be liable to pay long-term capital tax.


If you have earned a long term capital gain (by selling a house), you can reinvest the money either in a house or taxsaving bonds in stipulated period to earn a tax relief.


In case you have booked any taxable capital gains (on shares and mutual funds, etc.) in FY11, you can check your portfolio and consider booking short-term capital losses on shares or mutual fund units which are currently being quoted at a price less than your cost price.


So, if you have made any losses in stocks or mutual funds, it is the best time to book them before the yearend and offset such losses against capital gains. Such losses can be set-off against the gains you may have made earlier this year and would effectively reduce your income tax on such gains. For example, if you have earned a short-term capital gain of . 10 lakh by selling a house, you can offset the gain if you book a capital loss in stocks or mutual funds. Let us assume you have made a short term loss of . 7 lakh on equity investment then the capital gains tax is levied only on the balance amount, which is . 3 lakh.


You should compare the amount of tax savings with the transaction cost (in terms of brokerage etc.) and book the loss only if tax savings are higher than the transaction cost.

 

Happy Investing!!

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