Tax implications on long term equity investment

POSTED BY Reena ON November 27, 2012 9:29 am COMMENTS (6)

Hi,

I have read a lot of your articles and found them very useful. I have a small query.

I understand that the profit on investment over one year in a stock is tax exempt. If a person sells one stock after 6 months and invests that amount again in another stock for other 6 months. Will this be considered as investment in stocks for continuous one year and will the profit be tax exempt?

Also, is the profit in one stock compensated by the loss in another stock in order to calculate the taxable profit?

Thanks,

Reena

6 replies on this article “Tax implications on long term equity investment”

  1. Reena says:

    Thanks for the reply, Ramesh, TheZionView and bemoneyaware. This makes it much clear. There is one point on which I noticed contradiction in your statements.

    Ramesh has mentioned, “Short term capital gains canbe adjusted against short term capital losses.
    While, long term capital gains/ losses are a separate category.”

    On the contrary, bemoneyaware has mentioned, “If you have short term capital loss from equity you can compensate it against short term or long term capital gains of the same year.”

    Also, I understand that only the shares sold in a particular financial year will be considered for that year’s tax implications irrespective of when they were bought. The category – long term or short term will be decided based on how much long ago was the share bought.

  2. bemoneyaware says:

    As explained by the ZionView Each purchase/sale transaction is matched on a First-In-First-Out basis(FIFO). So period of holding the stock depends on what date you bought. Explaining with example:
    If you have bought :

    1000 units at Rs. 10 on 1 Jan 2008,
    1000 more units at Rs. 15 on 1 May 2008
    1000 more units at Rs. 16 on 1 Dec 2008

    and sold

    2500 units at 17 on 30 December 2009,

    Each purchase/sale transaction is matched on a First-In-First-Out basis(FIFO). So holding period has three cases .
    No of Shares Purchase Details Sale Details
    1000 Rs 10 on 1 Jan 2008 Rs 17 on 30 Dec 2009
    1000 Rs. 15 on 1 May 2008 Rs 17 on 30 Dec 2009
    500 Rs. 16 on 1 Dec 2008 Rs 17 on 30 Dec 2009

    Long term capital gains from equities are not taxed if shares are sold through recognized stock exchange and Securities Transaction Tax, or STT, is paid on the sale.

    So in your case there will be two short term capital gains.
    If you have short term capital loss from equity you can compensate it against short term or long term capital gains of the same year.
    the law allows for any unabsorbed loss to be carried forward for 8 years. However the taxpayer has to file a loss return, failing which the unabsorbed loss will not be allowed for set-off.
    Reference: Basics of Capital Gain
    Cost Inflation Index,Indexation and Long Term Capital Gains

  3. TheZionView says:

    Reena
    Lets take each case one by one

    You buy stock A on Apr 1 2012 For 10000

    Sell Stock A on Aug 1 2012 For 12000 with profit of Rs 2000

    Now you buy stock B on Aug 2 2012 for 12000

    Sell stock B on Mar 1 2012 for 11000 with loss of 1000

    Now lets see how the tax is calculated

    For Stock A you have made Short term Captial Gain (STCG)of Rs 2000
    For Stock B you have made Short term Captial Loss of Rs 1000

    Tax on these stocks=Short term Captial Gain – Short term Captial Loss
    i.e. 2000-1000=1000 So you have to pay tax for this Rs1000 under short term captial gain tax

    In case you had sold the stock B after 1 year of holding and made loss then it cannot be deducted from STCG and you will have to pay tax for Rs 2000

    Also remember you can carry forward your short term capital loss for 8 years.
    Which mean if in 2012 if you made loss of 10000 but no gain it can be carried forward for maximum of 8 years during which time if you make any short term captial gain you can deduct this loss from that gain.

  4. Reena says:

    Thanks for the reply, Raj. This link confirms that investment in Equity over one year is not taxed. However, my question was, if we sell a share in less than one year, but invest that amount in another share and keep that much money invested in one of the other stock for over one year, will that be considered as the investment in Equity for over one year?

    Also, is the profit in one stock compensated by the loss in another stock in order to calculate the taxable profit?

    1. Ramesh says:

      No it would not. It will be treated as multiple short-term investments.

      Short term capital gains canbe adjusted against short term capital losses.
      While, long term capital gains/ losses are a separate category.
      Income from salary is another different category.

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