Made Capital Gains on Equities in FY24? Here's How to Save Tax
Rounaq Neroy
Mar 19, 2024 / Reading Time: Approx. 9 mins
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In the financial year 2023-24 (FY24), Indian equities have rewarded investors with handsome returns. The bellwether, S&P BSE Sensex -Total Return Index (TRI) clocked 24.7% absolute returns, while the S&P BSE Mid Cap Index -TRI and S&P BSE Small Cap -TRI have clocked even more stupendous, 60.1% and 55.2% absolute returns respectively (as of 18th March 2024).
But along with striking gains, there have been disappointments as well. If you have booked profits, i.e. earned capital gains in equities -- whether short term or long term -- or in certain cases booked a capital loss, or are considering doing so, this article will elucidate how you could save tax.
First, let's understand the basics...
Note, that the capital gain or loss is computed by reducing the cost of acquisition from the sale or full value of the consideration received from the capital asset. If the cost of acquisition is greater than the sale value, it is a capital loss. On the other hand, if the sale value is greater than the cost of acquisition, it is a capital gain made.
If the capital gains are realised on units of equity-oriented mutual funds and/or listed equity shares held for a period of less than 12 months, it is considered as Short Term Capital Gain (STCG). Conversely, if you have booked a loss in less than 12 months, it will be treated as Short Term Capital Loss (STCL)
For units of equity-oriented mutual funds and/or listed equity shares where the holding period is 12 months or more, the realised capital gains are considered as Long Term Capital Gains. Whereas if a loss is booked after 12 months of holding period on equity-oriented mutual funds and/or listed equity shares, it is treated as Long Term Capital Loss.
How Are Capital Gains Taxed?
Short Term Capital Gains - These in the case of equity investments, for both equity-oriented mutual funds and listed equity shares, are taxed at a flat rate of 15% in the financial year, irrespective of the income-tax slab rate you are in.
Long Term Capital Gains - As per the current tax rules, these are taxed at the rate of 10% on the LTCG made over Rs 1 lakh in the financial year. In other words, only LTCG in excess of Rs 1 lakh is taxable. LTCG is taxed without indexation benefit in the case of equity-oriented mutual funds and listed equity shares. If the LTCG is below Rs 1 lakh, it will be tax-exempt.
To protect the interest of long-term investors, there is also a grandfathering clause (under Section 112A) introduced on 1st February 2018. This makes LTCG tax prospective, and the tax is levied only on gains from 1st February 2018.
For this purpose, to compute the cost of acquisition, the Fair Market Value (FMV) or Actual Selling Price (ASP), whichever is lower is considered. Call this as Value 1. Further, either this computed value (i.e. Value 1) or the Actual Purchase Price (APP), whichever is higher, is considered.
Thus, the LTCG where the grandfathering clause applies is computed after deducting the cost of acquisition as above from the sale value.
How Do You Save Tax on Capital Gain on Equity Mutual Funds and Shares?
The Income Tax Act, 1961 provides for set off and carry forward of capital gains against capital losses.
However, the rule here is that the set-off cannot be against any other head of income when computing the total taxable income. In other words, the capital loss can be set-off only against the 'Capital Gains' head.
Further, as per the rules, if there is a Long Term Capital Loss (LTCL), it can be set off only against LTCG. So, only net LTCG over Rs 1 lakh will be taxable.
In contrast, the Short Term Capital Losses are permitted to be set off against both Long Term Capital Gains and Short Term Capital Gains.
As far as the carry forward of capital losses is concerned, in case you are not able to set off the capital losses in the same Assessment Year, it can be carried forward up to 8 years for both Short Term as well as Long Term Capital Loss.
In FY24 if you have certain notional losses in your portfolio -- whether it's equity funds or listed equity shares -- they can be converted to realised or actual losses, particularly for investments that don't seem very worthy of keeping in your portfolio. This is referred to as 'Tax Loss Harvesting', a strategy that may help reduce your tax outgo.
Tax Loss Harvesting makes sense now, as the Indian equity market is near a lifetime high. You could book capital gains on some investments (that have built wealth) as well as a capital loss on some (that have left you disappointed).
Note once again, that you are required to pay tax only on net capital gains. By setting off the realised capital loss against the realised capital gains during the financial year by indulging in Tax Loss Harvesting, you could reduce your tax liability.
Say you have an LTCG of 2 lakh and STCG of 60,000, but also are witnessing a notional LTCL of Rs 50,000 and STCL of Rs 40,000; by booking these losses as before 31st March 2024, your net capital gains shall reduce to Rs 1.70 (instead of Rs 2.60 lakh).
Table 1: Tax Loss Harvesting
|
Amt (in Rs) |
|
Amt (in Rs) |
Tax Liability After Set off (in Rs) |
| Long Term Capital Gain |
200,000 |
Long Term Capital Loss |
50,000 |
150,000 |
| Short Term Capital Gain |
60,000 |
Short Term Capital Loss |
40,000 |
20,000 |
| Net Capital Gains |
170,000 |
(For illustration purposes only)
In case there is still a capital loss that can be set off against the capital gains, it can be carried forward to the next financial year (for up to a maximum of 8 assessment years).
To make the best of the Tax Loss Harvesting strategy, take a close look at your capital gains statement (sourced from RTAs, your distributor, or broker). Ensure the grandfathering in case of LTCG for holdings before 1st February 2018 is applied for the computation. In an online world, most of this data is made available to you, the investor.
When you are deciding on Tax Loss Harvesting, ensure you are carefully evaluating the holding period so as to determine short-term or long-term as the case may be, whether for capital gains or losses.
Further, make sure you are weighing the capital gains vis-a-vis the capital losses to refrain from excessive Tax Loss Harvesting. Ideally, ensure you are doing an optimal set-off.
The 7 Key Benefits of Tax Loss Harvesting Are...
-
Reduces your tax liability on capital gains
-
Nudges you to review and rebalance your investment portfolio
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Declutter your portfolio or consolidate it
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Culls off underperforming and unsuitable investments
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Ensures you hold well-performing investments
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Frees cash (which could be redeployed back into equities or for any asset class or used for any other purpose)
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Helps maintain an adequately diversified investment portfolio
Having said that, when you are engaging in reviewing your investment portfolio with the objective of Tax Loss Harvesting, make sure you aren't losing sight of your asset allocation (i.e. money deployed into equity, debt, and gold). If your asset allocation is right and investments are performing well, it would ensure that you are on track to achieve your envisioned financial goal/s.
To sum-up...
In years where your taxable income is high, following a Tax Loss Harvesting strategy and making tax-saving investments shall help you save tax legitimately.
In the current market conditions, where Indian equities have corrected, particularly small caps and mid caps, reviewing your portfolio from a Tax Loss Harvesting standpoint makes sense. It would help clean your investment portfolio and save tax.
Remember, a penny legitimately saved from tax is a penny earned.
"In this world nothing is certain but death and taxes" - Benjamin Franklin
Happy Tax Planning and Investing!
Note: This write-up is for information purposes and does not constitute any kind of investment advice or a recommendation to Buy / Hold / Sell a fund. Mutual Fund Investments are subject to market risks, read all scheme-related documents carefully before investing.
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ROUNAQ NEROY heads the content activity at PersonalFN and is the Chief Editor of PersonalFN’s newsletter, The Daily Wealth Letter.
As the co-editor of premium services, viz. Investment Ideas Note, the Multi-Asset Corner Report, and the Retire Rich Report; Rounaq brings forth potentially the best investment ideas and opportunities to help investors plan for a happy and blissful financial future.
He has also authored and been the voice of PersonalFN’s e-learning course -- which aims at helping investors become their own financial planners. Besides, he actively contributes to a variety of issues of Money Simplified, PersonalFN’s e-guides in the endeavour and passion to educate investors.
He is a post-graduate in commerce (M. Com), with an MBA in Finance, and a gold medallist in Certificate Programme in Capital Market (from BSE Training Institute in association with JBIMS). Rounaq holds over 18+ years of experience in the financial services industry.
Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.