How to benefit from capital gains or losses

Discussion in 'School Of Stock Market' started by Vidhi Khanna, Jul 7, 2015.

  1. Vidhi Khanna

    Vidhi Khanna Active Member Staff Member

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    Implication of capital gains tax in the equity markets is subject to the holding period of the security. Short term capital gain is applicable on transactions, whereby investor holds a listed security for a period equivalent to or less than 12 months. Short term gains on listed securities are taxable at 15%. Long term capital gains arise when the investor holds the listed security for a period more than 12 months and they are not taxable. An investor can use capital gains/losses to his/her advantage.

    We will study the subject with the help of an illustration.
    • Mr. Kapoor buys 100 shares of a company A for the price of Rs1000/share
    • After few days, the company declares bonus in the ratio of 1:1
    • Mr. Kapoor gets 100 shares bonus, with the total tally amounting to 200 shares. As no price is paid for the bonus shares, the price per share is accounted at Rs500/share. In such a case, two scenarios can emerge
    Scenario 1: Mr Kapoor sells 200 shares @ Rs600 within 1yr of purchase. Short term capital loss of Rs40,000 on 100 initial shares ie: (600-1000)*100. On100 bonus shares, short term capital gain of 60,000 arises. Short term capital gains tax of 15% is applicable on net gain of 20,000
    Scenario 2: He sells 100 initial shares @ 600 within 1yr of purchase and sell 100 bonus shares after 1yr of allotment date. This results in to short term capital loss of 40,000 on initial shares and long term Capital gain of 60,000 on bonus shares. No tax is levied on bonus shares, while short term capital loss of 40,000 on initial shares can be adjusted against short term capital gains for 8 years.
    We can elaborate the subject with help of other examples
    • Mr. Kapoor has bought security X for the amount of Rs500,000 and security Y for the amount of Rs700,000 on May 7, 2014
    • On December 12, 2014, Mr. Kapoor decides to sell X at the market value of 400,000, resulting in to loss of 100,000. He also sells Y at the market value of 770,000, translating in to profit of 70,000. The sum of the two transactions indicates a net loss of Rs30,000 for Mr. Kapoor. In case of such scenario, He can adopt various options
    • Option 1: Securities X & Y held for a period of more than 12 months, with a expectation of prices to rise. This entails no capital gains tax.
    • Option 2: Profit booked in security Y, while security X held. In such a case, short term capital gains tax of 15% is levied on 70,000.
    • Option 3: Loss and profit booked in security X & Y respectively. In this case, net loss of Rs30,000 can be adjusted with short term gains for 8yrs.
    • Option 4: Security Y held for more than 12 months and loss booked in security X. On security Y, no tax is applicable, while capital loss of Rs100,000 on X can be carried forward for 8yrs.

    Source: Newsletter sent by IIFL
     
    arvindthakur79 and roopakumar like this.
  2. ABK

    ABK New Member

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    Thank u for giving detailed information abt capital gains
     
  3. priya agrawal

    priya agrawal Member

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    Yes capital gains varies from the holding period. Some securities does not offer good returns in short term but in long term it may offers good returns.
     
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