You can use the following 6 good ways for year end tax planning.
1. Let your dud stocks help you save tax
Since long-term capital gains from stocks sold on stock-exchange is exempt from tax; long term capital losses from the stocks is also not allowed to be set-off and / or to be carried forward. Therefore you should convertyour short term unrealized losses from stocks into actual loss and reduce your tax liability.
What if you want to retain the loss making stocks for a long term? It’s very simple—just sell it on or before March 31 and buy it back any time from 1st April onwards. In other words, book temporary loss for tax purpose.
In simple words, it is always preferable to book short term capital losses at the end of financial year on your loss making stocks (even if you want to keep them for long term and don’t want to dispose) and buy them in next financial year. By that way, you will be able to lower your capital gains (by utilizing these losses for setting off against your other capital gains) and consequently lowering your tax liability.
2. Use bonus-stripping
Do you know that bonus shares also provide tax arbitrage opportunity? How? What is the relationship between issue of bonus shares and saving tax?
The practice of buying the shares at cum-bonus price and selling the ‘original shares’ at ex-bonus price and booking short term losses in the process is called ‘bonus stripping’ and similar to ‘dividend stripping’.
As per the current IT provisions, tax laws allow ‘bonus stripping’ in case of equity shares.
So, if during the financial year, you’ve purchased any shares against which company has further allotted you bonus shares, then you must sell the ‘original holdings’ and book short term capital loss.
But how does it help save tax? Let me explain with the help of an example, suppose you purchased 100 shares of ABC ltd at a price of Rs 300 per share in the month of November 2012. Later on, in the month of January 2013 when the price was ruling at Rs 350 per share, the company came with 1:1 bonus and you were allotted 100 additional shares so that after the bonus issue, you held 200 shares at the adjusted ex-bonus market price of Rs 175 and now the market price is ruling at, say, Rs 200 per share. Now, if you sell the original 100 shares and keep the ‘bonus shares’, you can book a short term capital loss of Rs 10,000 (Rs 20,000 – Rs 30,000) for tax purposes.
Your next question will be: Won’t this tax benefit get set-off against gains from selling bonus shares? Yes, only if sell the bonus shares before one year from the date of allotment. On the other hand, if you sell the bonus units after a period of 12 months, the capital gains will be long term and therefore completely exempt.
3. Invest your short term surplus in Debt Funds
By investing in a Debt Funds at the end of the financial year (i.e., the month of February & March), you an avail an additional year indexation benefit by holding the investments >3 yrs. Also, UNLIKE FD’s there is NO TDS deduction in debt funds. Considering the benigh interest rate scenario over next year, it makes a lot of sense to invest in debt funds. In case of partial withdrawals, the tax treatment is applicable only to the capital gain and not on the principal amount. So you benefit in terms of lower tax payments.
4. Advance tax payment: Way out
Note that even though TDS is being deducted by your employer on your salary income, you are liable for payment of advance tax on your other income like interest, capital gains etc if the tax liability exceeds Rs 5,000.
It is good, if you can calculate tax on your other income and pay the advance tax by yourself. But if you want to avoid the hassle, there’s a way out. You can submit the particulars of ‘other income’ to your employer and request him to deduct tax on your additional income. The employer cannot refuse because it’s a right provided to you under income tax law.
5. Get Form-16, even if tax on your salary income is ‘nil’
Form -16 is more important than your tax-return. Now-a-days everybody asks for it as proof of your income. So how to ensure that your employer issue you a Form-16 even when your salary income is below the basic exemption limit. In other words, how to force the employer to deduct a nominal amount of tax and issue you a TDS certificate in ‘Form-16’
There are two possible scenarios:
o Your income is below taxable limit without availing section 80C deductions: Submit a declaration showing other income such as capital gains, income from house property, interest on savings account, bank FDs, NSC, KVP and NCDs (if any).
o Your salary income goes below taxable limit only after availing section 80C deductions: Don’t submit any proof for tax savings or submit so much evidence so as to bring your taxable salary income to such a level which is marginally higher than basic exemption limit.
In both the cases, your employer would be forced to deduct TDS from your salary income and issue you a TDS certificate in ‘Form-16’.
6. Avail depreciation benefit on cars, books & computers
If you’re a professional and planning to buy a new car, books or a computer, consider purchasing on or before March 31 to avail depreciation benefit for 6 months and thereby save tax.
Remember this financial year FY 14-15 , the tax deduction u/s 80C has been increased to 1.5 lacs and the home loan interest deduction u/s 24 has increased to 2 lacs. Avail these benefits.
Be a Smart Investor and savvy tax saver….
Cost of Inflation Index upto FY 2013-14. (The year mentioned is financial year(FY)
The cost of inflation index is useful for income-tax assesses in the computation of tax on long-term capital gains (for indexation purposes). In the previous two years, the cost inflation index rose 10 per cent and 12.5 per cent, respectively.
A cost inflation index helps reduce the inflationary gains, thereby reducing the long-term capital gains tax payout for the taxpayer. Currently, the income-tax law allows long-term capital gains to be computed after adjusting for inflation (Debt Mutual Funds, FMP’s, Real Estate Gains etc.) .
The cost of acquisition as well as the cost of improvement is adjusted for inflation between the date of purchase and date of sale (through the cost inflation index) before the long-term capital gain is ascertained.
Assume, if the investor invested Rs 1,00,000 in the growth option on March 30, 2012 and redeemed the investment on April 2, 2013 for Rs 1,10,000
The investment happened in financial year 2011-12, for which the government has declared cost inflation index of 785.
The investor redeemed the investment in financial year in 2013-14, for which the cost inflation index is 939.
The capital gains is Rs. 110,000 minus Rs. 100,000 i.e. Rs. 10,000.
The holding period is 367 days, which is more than 1 year. Therefore, it is a long term capital gain.
The maximum tax the investor has to bear is 10% (plus surcharge plus education cess) on the capital gain of Rs. 10,000. Thus, the maximum tax payable would be Rs. 1,000 (plus surcharge plus education cess).
Investor can benefit from indexation. The indexed cost of acquisition is Rs. 100,000 X 939 ÷ 785 i.e. Rs. 119,618 . This is higher than the selling price of Rs. 110,000. Thus, the investor ends up with a long term capital loss of Rs. 9,618. So no tax payable and also this can be set off against long term capital gains, as discussed in the next section.
Another point to note is that although the investor held the investment for slightly more than a year, the investor gets the benefit of indexation for two years viz. 2011-12 and 2012-13. Hence the name “double indexation” for such structures.
Mutual funds tend to come out with fixed maturity plans (FMP’s) towards the end of every financial year to help them benefit from such double indexation. Even short term debt is a good investment towards the financial year end, as they too offer the same benefits.
Largely investors are unaware about this benefit. This benefit can and should be taken by investors who are in 30% tax bracket as they get the maximum benefit. So, invest in wither FMP’s or Short term Debt (Holding period > 1 yr) towards the end of a financial year, and sell towards the beginning of a financial year and take advantage of double indexation tax benefit for virtually tax free capital gains. Money saved is indeed Money earned.
Be Money Savvy and invest smart. Happy Investing.