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Opinion - Taxation


Plans to share and save

T. C. A. Ramanujam

T. C. A. Ramanujam on ways to save capital gains tax on sale of shares

IN THE past 10 years and more middle-class investors have taken to the share market in a big way. The recent stock market swings have meant substantial profits and losses for investors.

The announcement last year that purchases of shares made then will be exempt from long-term capital gains tax was an incentive.

Several such factors have worked in favour of the capital market in the past four months. Is there any way of avoiding capital gains tax in respect of share transactions?

Is it possible to minimise the impact by suitable tax planning? An analysis of the legal provisions and judicial pronouncements will help.

During last year's Budget speech last year, the Finance Minister had observed:

"In order to give a further fillip to the capital markets, it is now proposed to exempt all listed equities that are acquired on or after March 1, 2003, and sold after the lapse of a year, or more, from the incidence of capital gains tax. Long-term capital gains tax will, therefore, not hereafter apply to such transactions. This proposal should facilitate investment in equities. I will, however, re-examine the effects of this exemption in the next Budget, and the scheme will be in force until then."

The amendment in this regard was explained by the memorandum in the following words:

"In order to give incentive for investment in equity shares, it is proposed to insert a new clause (36) in Section 10 so as to provide that any income arising from transfer of a long-term capital asset, being equity share in a company listed in any recognised stock exchange in India and acquired on or after March 1, 2003, but before March 1, 2004, shall be exempt from tax."

It should be noted that the exemption is available only in respect of long-term capital gains. It will not be available for bonus shares or shares obtained by gift, will or inheritance. Nor it will be available for shares allotted on amalgamation or demerger or upon conversion of preference shares and debentures. To get the exemption, one should have purchased the shares on or after March 1, 2003, and held them for at least 12 months before sale.

Plan your affairs

Valuation of shares comes in handy for tax planning. It is possible that losses are also incurred along with profits. Suppose a company declares a 3:1 bonus, and you buy one share at the quoted cum-bonus price of Rs 5,000. Once you receive the bonus, your holdings are four. You sell the original share ex-bonus. After receipt of bonus shares, the ex-bonus value of the shares is, say, Rs 1,300. You sell the original share for Rs 1,300 and a capital loss of Rs 3,700 is incurred.

This loss can be claimed against other short-term gains made without exemption. The bonus shares will be valued taking the cost as zero. Even if you do not hold on to the shares for 12 months, you can claim the resultant short-term capital loss against short-term capital gains in the market.

We have known of dividend rigging, that is, buying shares cum-dividend and sell ex-dividend. Since dividend is exempt, you get tax-free income. The law in this regard was amended to prevent sale of shares immediately on their becoming ex-dividend (Section 94(7) amended by the Finance Act, 2001,w.e.f. April 1, 2002).

But purchase of shares cum-bonus and sale of the same ex-bonus still gives room for substantial tax planning. But dealings in such shares are not frequent, as companies do not often declare bonus shares. And, the sale of shares ex-bonus results in a notional loss only. It is possible that the law may be amended to plug this apparent loophole in respect of purchase and sale of shares at the time of declaration of bonus shares.

It is also necessary to remember that the character of holding, namely, whether it is long-term or short-term, will be determined by the date of acquisition and sale. The shareholder will be entitled to be treated as the owner of the shares only when his name figures as the owner in the register of the company.

The exemption announced by the Finance Minister for long-term capital gains tax applies only to shares listed on the stock exchange.

There is the further requirement that the shares should have been purchased after March 1, 2003. The future of long-term capital gain tax exemption will be known only when the next Budget is presented by the new government.

(The author is a former Chief Commissioner of Income-tax.)

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