Punit Jain & Associates

If you are a Business Owner,

here's your To Do List before 31st March, for your business.

1. Plan your Taxable profits, by making provisions for all accrued expenses.

2. Make your Tax Savings Investments. E.g. Investment in ELSS mutual funds, Medical Insurance, PPF, Donations etc. (applicable for proprietorship business)

3. Take a count of your inventory / stock-in-hand as on year end. (applicable for business dealing in goods and products)

4. Purchase Fixed Assets, necessary for business, to claim 50% of allowable full year depreciation under Income Tax.

5. In case of inter-company loans or loans from relatives, provide Interest expenses or clear off the loan balances, if possible. to have a good debt-equity ratio for business

6. Pay 90% of your Income Tax Liability for the Financials Year to avoid interest u/s 234(b) of Income Tax Act.

7. Calculate your Annual GST turnover and GST thereon and reconcile it with the GST returns filed.

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As the FY 2020-21 is closing, every one is busy in tax planning. However, very few can know how equities are taxed in India and how can save income tax with planning by sale of shares.

Following are simple logical steps to save long term and short term tax.

1. Let us understand first types of capital gains that are taxed in equities. These are,
a.Short term capital gains
b.Long term capital gains.

2. If an investor is holding shares listed on a recognized stock exchange (NSE, BSE) for more than 12 months, the gain/loss arising from the sale shall be ‘Long’ term. Else, it shall be ‘Short’ term.

3. Now let see the rates of taxes on these gains.

A. Short term gains on the above shall be taxed at 15% u/s 111A if STT (Securities Transaction Tax) is paid. Please note that usually every investor pays STT which is charged at 0.1%, both at the time of buying as well as selling the shares.

B. Long term gains on the above shall be taxed at 10% u/s 112A only on capital gains exceeding Rs. 1 lakh. So, if your long term gains come at Rs. 3 lakh, then you need to pay Rs. 20,000 (10% of Rs. 2 lakh).

4. Now, few more important things to note here. Resident Individual/ HUF do not need to pay tax if their income is less than Rs. 2.5 lakh. So, if the gains on equities are less than this limit, one need not pay tax (assuming there is no other income)

5. ‘Short’ term loss can be adjusted against both short term gains (taxed at 15%) as well as long term gains (taxed at 10%). However, ‘Long’ term loss can be adjusted only against long term gains (taxed at 10%)

6. So, the very first tax saving tip here is to book short term loss on shares. To simplify, sell the short term shares in loss before 31st March. By doing this, you are actually using that loss to set off against your short term gains and hence save tax at 15%.

7. Follow this. Look at your portfolio, there can be few stocks which you bought during the financial year. If it is making loss, sell them and book the loss on paper at least. Doing this will help you set off it against both short term and long term gains.

8. Remember this, if you are convinced that the stock is a great buy even though in loss, you can buy again after a couple of days. But selling once and booking loss is actually helping you save taxes.

9. Also, if you are late in selling, say if you sell the stock in loss after one year, it will become long term loss. So, better to sell them during the FY.

10. And as discussed earlier, you cannot set off long term loss against short term gains (taxed at 15%). You will have to set off it against only long term gains (taxed at 10% and that too after the exemption of Rs. 1 lakh).

11. You must book long term gains on paper every year. Say you have shares that are making you a long term gain of Rs. 1 lakh, you need not pay tax on this as long term gains are exempt to the tune of Rs. 1 lakh. So, it is always prudent to book long term gains every year at least to the tune of Rs. 1 lakh. Remember, this limit of Rs. 1 lakh exemption on long term capital gains is every financial year.

12. Another one important aspect is filing of your income tax return in time. The due date for individual and HUF (non audit case) is 31st July and for others it is 31st Oct.

Belated return filing would mean non eligibility for carrying forward the short term and long term losses.

13. Short and Long term capital loss can be carried forward for 8 assessment years. Again, Long term loss can be carried forward to be used against only long term gains. Whereas, Short term loss can be carried forward to be used against both short and long term gains.

14. The losses from intraday trading are tagged as ‘Speculation loss’ and this cannot be set offed against the regular short term or long term loss on sale of shares.

15. So in nutshell,
a. Book short term loss before 31st March.
b. Book long term gains to save tax on gains upto Rs. 1 lakh.
c. File the income return on time.