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Capital gains tax is less when paid with indexation
I got 150 shares of ONGC through the employees' quota at Rs 270 per share in FY 1994-95. Subsequently, I received 462 bonus shares in the same FY. At present, ONGC shares are being traded at Rs 110 per share. If I sell these shares now, what will be my tax liability? Can I save this in some way?-Adarsh Jain, ajain@irssun450.irsongc.res.inYou will incur long-term capital gains, which is taxed at the rate of 10 per cent without indexation or 20 per cent with indexation. The first method results in tax of Rs 2,682. Now, the second method. The cost inflation index in 1994-95 was 259. The index for 2000-01 is not yet known. Let me assume it to be 410. Then the indexed cost of 150 original shares is Rs 64,112 [=150 x 270 x (410/259)]. The capital loss is Rs 47,612 [(=64112 - 150 x 110)]. Since the bonus shares are required to be taken at nil cost, the capital gains would be Rs 50,820 (=462 x 110). The net longterm gains are Rs 3,208 and the tax thereon at the rate of 20 per cent is Rs 642. Therefore, 20 per cent with indexation is better than 10 per cent without indexation. Incidentally, I have rarely come across a situation where 10 per cent happens to be better, except when one is selling only bonus shares.Now, I have a suggestion, rather two suggestions: Out of the 462 bonus shares, sell only 433 shares. You will find that the capital gains is almost nil and hence, no tax. You may hold on to the 29 extra shares until a more opportune time. Some time in the future, the structure of tax on capital gains is bound to change. The current base, which is April 1, 1981, may be shifted upwards, the entire structure may change or you may incur some capital loss, longterm or short-term, in the future, that you may wish to set off. Invest Rs 3,190 (=29 x 110) in Section 54EC that has a lock-in of three years. I am not very sure of its utility since I do not have details on its returns. You may contact me when such an instrument comes into the market.Is it not advisable to keep funds in PPF rather than opt for premature withdrawal because of the compounding effect of PPF.
Chowtash@eth.netI had stopped liking PPF ever since the large-scale amendments effected by FA92 on the tax structure of longterm capital gains. I like it even less now that the interest has been slashed from 12 per cent to 11 per cent. Coming to your query regarding the compounding effect, I am afraid you have to learn the mathematics of finance. The very first lesson a student learns is that in order to understand the concept of compound interest thoroughly, the primary requirement is to realise that from the financial angle, the following three situations are absolutely identical: Interest is compounded annually and paid at maturity;
Interest is paid annually and the investor reinvests it in the same or similar accounts;
Interest is paid annually and the investor spends it on his day to day needs.It is very easy to realise that the first two situations are identical. The third is rather tricky. The first has a built-in aspect of Compulsory Savings, whereas the second offers you flexibility in deciding how to reinvest this interest. I do not like any artificial compulsions, no matter what their nature. Do you? As a matter of fact, in certain situations, this loss of flexibility can give rise to a number of handicaps. I repeat, I hate compulsory savings. It is better to marshall the will to live by strict rules of responsible financial behaviour. Now, let us take up the third situation, which, as I said earlier, is rather tricky. Whenever you buy any utility article, say a refrigerator, you forgo the stream of income you would have received in the future by way of interest on your investment of that amount. You take this action only because the marginal utility of the refrigerator is equal to, if not higher than, the interest. Therefore, unless you are extravagant, the returns from the refrigerator are the same as, if not higher than, the returns from your investment. If you are still not convinced, let us look at the situation from the point of view of the borrowing company. The rate of interest it pays does not depend upon whether the interest is being paid regularly or cumulatively nor upon what the lender does with the amount received by him. My advice is to withdraw from PPF as soon as you can and invest in suitable UTI or mutual fund schemes. Or utilise the amount for regular expenses and deposit an equivalent amount from the current income in Infrastructure Bonds. My family members and I have about Rs 50 lakh in PPF. I want to know from which date PPF interest rates were reduced. I find that SBI has applied the rate of 11 per cent from January 1, 2000. Is this right? Please let me know expeditiously since a large amount is at stake.
R Sharad Kumar, rsharadkumar@vsnl.comThis is the best example of bureaucratic lethargy and indiscretion. The authors of the legislation are not in contact with the ground realities and have chosen January 14, 2000, as the date of implementation of the unilateral diktat. They should have chosen the end of January or February (or preferably April 01, 2000) to avoid any confusion. No one, not even the SBI, leave alone the National Savings Organisation, issued a circular explaining the modus operandi to handle this rare situation. This has created chaos and all the account offices are interpreting the diktat as per their own whims and fancies. Can you believe that one of the offices asked my advice after finding that repeated requests to their head office did not elicit any response? The author may be contacted at anshanbhag@yahoo.com. Copyright © 2000 Indian Express Newspapers (Bombay) Ltd.
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