How To Get Benefit Of Zero Rate Of Tax On Capital Gains


Investors in equities conduct most of their transactions on the stock exchanges so this leads to a situation where they are entitled to the beneficial rate of tax on their long term capital gains. This rate is zero per cent so it saves a lot of tax especially when the capital gain is large. There are however several transactions wherein the benefit of this situation will not be available and hence this is an area that needs attention of the individual. This will also lead to a position where there is a tax payment that arises and hence it is something that needs to be considered in the overall calculations.
Overall situation
In case there is a sale of shares on a stock exchange and the holding period is 12 months or more plus securities transaction tax is paid on the transaction then there is a benefit in terms of a beneficial rate of tax. The capital gains that would arise in this situation would be considered as long term capital gains and there is a zero rate of tax on these gains. In case the condition for the beneficial rate to be applicable is not fulfilled then there would be a tax that will have to be paid on the gain. This can be calculated as either 20 per cent of the gain after taking the benefit of indexation or it could be 10 per cent of the gain without taking the benefit of indexation. The individual can undertake the workings for both these calculations and then choose one that will be suitable for them.
Physical shares
There are a lot of situations wherein the individual has some physical shares that they own. Companies often buy back these shares or in some cases these are bought by a new owner who makes an open offer for the shares. Since the shares will not be sold on the stock exchange because these are physical shares in certificate form which cannot be traded on the exchange as these can be traded only in demat form. This will involve a separate tax working for these shares. In most cases the individual will sign a transfer form and then sell these shares to whoever wants to buy them. This will result in a situation wherein the shares will not be eligible for the lower rate of taxation that they would be able to get in other situations. There are a lot of cases wherein shares bought at very low rates are bought back at high prices and there are large gains for the investors. The only thing that will be witnessed in such a case is that there would have to be some tax to be paid.
Off market transfers
One of the ways in which an individual can sell the shares is by transferring them in an off market deal. This again happens when there is an open offer for the shares and these have to be tendered to the buyer or it could be a situation wherein these are sold to some other investors by transferring them to their demat account. Here the situation is different from the earlier case in the sense that the holding is in a demat form but still the beneficial rules would not be applicable. This happens as the shares are tendered and sold outside of the stock exchange so there is no transaction on the stock exchange which is a condition that needs to be fulfilled if the benefit of the zero rate of tax has to be taken. The individual thus would be just transferring their shares to the demat account of the buyer but when they fill in the delivery instruction slip they would be using the section for off market trades. This will once again require them to pay a tax if there is a gain that they earn on the investment.



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