In case I sell shares within one year I believe the gain if any is termed as short-term gain.

Is the tax applicable just 15% of the gains? If my other income is say Rs 50,000, would I have to pay tax on the full amount of short-term gain or would I get the benefit of the Rs 1,00,000 short-fall in the basic exemption limit?

?Brijesh Shah

The short-term capital gains tax rate is 15%. However, note that if your other normal income chargeable to tax falls below the tax threshold applicable to you, the gains would be reduced by the amount by which the total income so reduced falls short of the threshold and the balance of the gains would be taxed at the rates applicable. In short, where the tax liability arises only because of inclusion of the capital gains in the total income, tax is levied at the corresponding flat rates on the excess over the minimum taxable limit. In your case, say your short-term capital gains amount is Rs 1.25 lakh. Then from the basic exemption limit, Rs 50,000 would be taken up by your other income. The balance Rs 1,00,000 would be set-off against the short-term capital gains. Hence, you would have to pay 15% tax on the remaining Rs 25,000 only.

I bought 100 Sesa Goa shares about 18 months ago at Rs 1,600/share net. The share was split on September 19, 2008 and my holding became 1,000 shares. After the allotment of 1:1 bonus on September 6, 2008, the share holding became2,000 shares. Since the share price went down, I sold all the 2,000 shares on October 10, 2008 at the net price of Rs 84/share. Will I have to pay 15% plus 3% cess on the sale of bonus shares (1000 shares) or since I have sold the shares within 9 months of allotment of bonus shares I do not have to pay any tax. Will appreciate your views on the tax angle.

?K S viswanathan

The 4 conditions applicable for Sec 94(7) for dividend and bonus stripping to be operational are –

1. The purchase of securities (including stocks and shares) or units has to be within 3 months before the record date for dividends.

2. The sale of these securities or units has to be within 3 months after the record date for dividends.

3. The dividend has to be tax-free.

4. The transaction has to result in a loss.

If all these conditions are simultaneously satisfied, the loss arising to the taxpayer on the sale to the extent it does not exceed the income has to be ignored for computing the income.

In the case of units of an MF, as per Sec 94(8) inserted w.e.f. FY 04-05, the period of 3 months after the record date has been extended to 9 months. Moreover, where bonus units have been issued, and the transactions result in satisfying the 4 conditions mentioned above, the loss resulting from sale of all or part of original units, while continuing to hold all or any of the additional units, will be ignored. The amount of such a loss shall be considered as the cost of acquisition of the remaining bonus units.

Note that there is no provision for bonus stripping in the case of shares.

Applying these conditions to your case, you will find that ?

1. The cost of acquisition of the original 100 shares (subsequently split into 1,000 shares) is Rs 1,60,000. These were sold at Rs 84,000. Consequently, you have earned long-term capital loss of Rs 76,000 on the sale. Since long-term capital gain is exempt, the long-term loss is also exempt. You can neither setoff this loss against any other income nor can you carry it forward for setoff in future.

2. The bonus shares were allotted on 6.9.08 and therefore, you have earned short-term capital gain thereon.

Since the cost of acquisition of the bonus shares is required to be taken as nil, you have earned a short-term gain of Rs 84,000 on which the tax is payable @15.45%. This works out at Rs 12,978.

3. In other words, you have made an overall gain of Rs 8,000 after a holding period of over one and half years and tax thereon is Rs 12,978!!

True but unfortunate, this is the way our tax regime works.

I have sold a property after holding it for 2 years. The net short-term capital gain on the property is Rs 8 lakh.

My father bought shares worth Rs 10 lakh 2 months ago. The value has eroded in this market turmoil and they are worth 4 lakh only. So if he sells it today the loss will be 6 lakh.

So instead of my father selling them, if now I ask him to gift those shares to me and I sell them at Rs4 lakh, will I be getting a short-term loss of 6 lakh?

I want to adjust the short-term capital gain from selling the property, which was in my name against the short-term capital loss, which I get from selling the shares gifted by my father to me.

?Amit

There will be no tax incidence on either party arising from the gift of shares by your father to you. Moreover, when you sell such gifted shares, the cost and the holding period of the previous owner (your father) would be taken as your cost and the holding period respectively. And since short-term capital gains can be set-off against short-term capital loss, the strategy that you have outlined in your query is sound as per income tax law. However, the income tax officer could raise an objection that this arrangement was essentially undertaken to evade tax. While you can viably argue your case through the means of an appeal, it would be advisable to undertake such an action only if the tax saving potential is substantial. In other words, the means should justify the end.

The authors may be contacted at wonderlandconsultants@yahoo.com