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'You HAVE to pay tax on stock market gains!'
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November 07, 2007

You have sold shares and made profits but don't know what the tax implications will be? Will your profits attract short-term or long-term capital gains tax?

What if you have made losses trading in shares as well as in futures and options? can you set off those losses against your other income?

What are the tax implications for employees making profits from ESOPs?

In a chat with readers on November 6, Get Ahead tax expert Mahesh Padmanabhan answered these and many more queries related to the tax issues on capital gains and ESOPs.

For those of you who missed the chat, here is the transcript.

sonee asked, goodday to u! I'm 28 year old lady working in a government body earning 17000 p.m, i fall in the tax bracket. would u kindly advise me as to how much exemption women are entitled to and im interested in investing through SIP in ELSS for saving my taxes. Please advise which schemes to choose and how much should i invest to save taxes and make money. my income is 204000 pa.thank you very much.

Mahesh Padmanabhan answers, Good day to you too sonee; the basic threshold exemption limit for women is Rs. 1.45 lakhs. This means that income to this extent for you would be tax free in any case. In case we assume that your entire salary structure does not have any tax-exempt component, then you would be needed to save approximately Rs. 59,000 to reach zero tax status. It is a good idea to invest in ELSS MFs using the SIP route to avoid the pitfalls of stock market vagaries and better cash flow management. Most of the tax funds are good and you could also look at SBI [Get Quote] Magnum Tax Gain Fund and HDFC [Get Quote] Tax Saver fund.

ij asked, hi im an employee with about 8 lacs cost to company and we r free to structure our salary. kindly give best tax efficient structure.

Mahesh Padmanabhan answers, The easiest of target tax saving structure could be used initially to structure a component of your salary, which are including components such as medical expense reimbursement (upto Rs. 15,000), education allowance (upto Rs 2400 if you have 2 children), Food coupons (that could be used for grocery purchase too). Apart from these simple devices, you could use Fringe Benefit Tax (FBT) as a tool to reduce your tax. Structure under these FBT heads is liable to be taxed in the hands of the employer and not the employee. However, if the employee chooses to use the FBT tool then he/she could include the additional tax burden in their CTC. The idea of using FBT is that the tax rate is lower than the regular rate of tax, which ranges from 1.67% to 16.67% of the amount included under FBT liable heads. Some such heads are reimbursements related to car expense, attire expense, telephone expense, books & periodical expense, travel related expense, club membership fees etc.

Manoj Simgh asked, hi i m earning 14000 p.m, i would like to save income taxes by investing in some schemes. i had LIC [Get Quote],NSC. ARE THESE TWO SCHEMES SUITABLE FOR SAVING TAXES AT THIS MOMENT?

Mahesh Padmanabhan answers, You would do well to segregate the insurance needs from the tax saving needs. Yes LIC is a mode to save tax but it is better to look at it from the pure perspective of covering financial risks due to loss of life rather than tax saving. This is so because generally people tend to limit their life risk cover once they reach the target investment limit. Currently as interest is taxable wholly, it would be better to invest in tax saving instruments that generate non taxable income. Examples of these investments are; ELSS mutual funds, PPF, LIC etc.

rksahoo asked, Sir, i'm going to purchase a house this financial year. For the registration of the house i'm going to pay Rs 91,000 for the stamp duty purpose. Can u pl clarify whether this amount qualifies for savings for tax calculation?

Mahesh Padmanabhan answers, Yes, stamp duty and registration charges do qualify for tax deduction under section 80C.

bhavin asked, I had filed e return on 30/10/2007 (Audit-Proprietor concern) i got e acknowledgment from internet after this within how many days I have to submit acknoledgment to Income tax Office?

Mahesh Padmanabhan answers, Hi Bhavin, if you have e-filed your return using your digital signature then there is no need to submit the ITR V with the income tax department. However, in case you have not used the digital signature then you would need to submit the ITR V within 15 days of the date of filing of returns.

vin asked, i am planing to invest 4000/month for 20 years. after 20 years at the time of withdrawal all amt will be taxable or there will be zero tax based on long term investment?

Mahesh Padmanabhan answers, Hi Vin, you have not mentioned the instrument that you would be saving in. However, the principal component of your investment would not be taxable after 20 years, but the income from such investment may be taxable depending on whether it is a tax exempt investment or not. Of the current investment options, dividends from mutual fund / shares, interest from PPF, receipt from life insurance policies etc are not taxable.

rajdeep asked, Hi, I earn about 20,000 to 25,000 per month, as a freelancer from a company which deducts TDS of 10.33%, which is quite some. I have LIC, which is on my wife's name, cheques from my account, home loan, my question is how much benefit do I get.

Mahesh Padmanabhan answers, Hi Rajdeep, based on the information provided by you it would be difficult to work out the amount of tax benefit available to you. But here are the broad do-it-yourself easy steps to determine your tax impact.

Firstly you would need to draw-up an income & expenditure account (P&L a/c) and determine the taxable income. Thereafter take the deduction for the home loan interest payment (upto Rs. 1.50 Lakhs) and principal payment, insurance premium paid by you on behalf of your wife upto maximum Rs. 1 Lakh and then determine the tax liability. Reduce the TDS and determine the net situation (ie tax refund/payable).

Harpinder asked, I am a salaried person in a govt org. I had bought shares most of them were from IPOs, some were from market. Most of the holding are 3 to 13 years old. One was recent IPO which I had sold this year. what can be the tax formula for this type of income?

Mahesh Padmanabhan answers, Hi Harpinder, capital gains from sale of listed shares has the following implication: the gains from shares held from long term perspective (in excess of 12 months) is not taxable and those held for a short term (less than 12 months) is taxable at 10% (plus surcharge if applicable and education cess). The dividend from these shares is not taxable in the hands of the holder of shares.

manoj asked, Dear Sir,how do we show profits gained through share market in tax declaration. I mostly do small time futures and option trading. Also tell me about cash transactions.

Mahesh Padmanabhan answers, Hi Manoj, in case of the future & options trading, you would need to disclose the gain or loss under the head profits or gains from business or profession (would be treated as a normal business income / loss).

In case of cash transactions, according to a recent circular of the income tax department there are certain questions that needs to be answered in deciding whether the trade is to be treated as a speculative transaction or a regular transaction. In case the share is held with the intention of earning dividend then it has to be treated as a regular trade and not a speculative transaction.

Sachin asked, What is the Tax implication on SIP's?

Mahesh Padmanabhan answers, Dear Sachin, SIP or Systematic Investment Plan is a method of making prolonged investments over a period of time. Such SIPs could be made in tax saving or other mutual funds.

In case of tax saving mutual fund, the lock in period during which you need to hold the investment is 36 months. In case you liquidate such fund before this period then the gain is taxable as short term gain. In case of other mutual funds, the holding period is 12 months after which the gain is not taxable.

AP asked, hi, I got form 16 from my company ...all the informations are correct ....but the tax consultant who filed my income tax ...didn't mentione my full name in Saral form ..just middle and last name ...although all the informations are correct PAN card no ......what should i do? it okay since pan no is correct ...or i should do sumthing from else?

Mahesh Padmanabhan answers, Hi AP, no you need not do anything on this. The IT department also cross-verifies your name with the PAN data and they should be in a position to take care of this issue

Sanjeev asked, I have taken house on CLA and my company is deducting the rent Rs 8500/- (HRA Rs. 10080/-) and giving to my landlord, my company is saying there will not be any HRA exemption in this case..Please guide me for tax laiablity.

Mahesh Padmanabhan answers, Hi Sanjeev, in case the accomodation is in the name of the company then they would have structured your salary to accomodate this cost and you might be receiving only the net amount i.e. Rs 10080 minus Rs. 8500. In this case your company might not be including this amount (rent) as perquisite in your salary because of the recovery. Theoretically, what your company is doing is correct. Our suggestion is that you modify the lease agreement in a way that it is between the landlord and you, which will help you in availing the HRA benefit.

MBadri asked, How r u MAHESH. Suppose I bought house in 1994 for Rs 4 lakh. And sold it in 2007-08 for Rs.15 lakh. What will be my tax liability, how and why? Original purchase doesn't reflect in my recent years' IT returns as my income in 1994 was non-taxable. THANKS & HAPPY DIWALI IN ADVANCE.

Mahesh Padmanabhan answers, Dear Mr. Badri, Thank you for the greetings and wish you the same. In the situation given by you, the indexed cost of acquisition would be Rs. 863,320 i.e. Rs 400000 x 559 / 259 and the long term capital gain would be Rs. 636,680 ie. Rs. 15 lakhs minus Rs. 8,63 Lakhs. The capital gains tax at 20% would be rs. 127,336. In case you want to bring your tax component to zero then you would need to reinvest the gains portion in section 54EC bonds pertaining to NHAI or REC.

vishnurdy asked, hi mahesh i'm going to start my career in July (presently doing M.Tech). I have plans to do business in near future. What are the best options to invest my money so that i can get it back when i want?

Mahesh Padmanabhan answers, Hi Vishnu, in case you need the money in a short term period (say less than 2-3 years) and you want your principal to be safeguarded then it would be best to create a recurring deposit account with any bank and keep investing for that period. Else, in case you are not averse to risk then you could invest in ELSS mutual funds.

MBadri asked, How r u MAHESH. Suppose I bought house in 1994 for Rs 4 lakh. And sold it in 2007-08 for Rs.15 lakh. What will be my tax liability, how and why? Original purchase doesn't reflect in my recent years' IT returns as my income in 1994 was non-taxable. THANKS & HAPPY DIWALI IN ADVANCE.

Mahesh Padmanabhan answers, Hi We noticed a mistake in calculation sent to you. The index for the current year is 551.

Raghu asked, Hi, I am trading with shares and currently have made a profit of around 30k for this financial year. So, how much tax should I pay for such a capital gain (CG)? Also, I am salaried and my tax slab comes in the max slab (33%). Also, is the CG tax income added to the current income? Also, If I sell my shares after one year from the date of purchase, would I have to pay any tax on it? Raghu.

Mahesh Padmanabhan answers, Hi Raghu, In case such shares are listed and you have paid Securities Transaction Tax (STT) then in case of such shares sold after 12 months of holding would be exempt from tax. Else it would be taxable at 10% (Plus surcharge of 10% and education cess of 3%) totalling to about 11.33%.

Manoj.Mahato asked, Dear Sir, i use for share trading. What all documents i have to submit while filling tax declaration to show profits gained through share trading. Do we get them directly through the website only?

Mahesh Padmanabhan answers, Dear Manoj, the current return form do not require any document to be submitted. You would need to collate the working papers such as the demat statement, ledger extract, contract notes and the gains working statement and keep it on records. This can be called for at the time of assessment by the ITO.

Jayaraj asked, I am earning by private tutions to school pupils. My age is 58 yrs. I have not filed I.T. Return so far. Nowadays PAN Card and I.T. Returns are essential documents for raising loans from Banks. Can I obtain PAN Card and if I file I.T.Return will the I.T. Department sue me for not filing I.T.Returns so far? My annual gross income will be around Rs.two lacs. Please advise & guide.

Mahesh Padmanabhan answers, Dear Jayaraj, You would be needed to file returns if your net taxable income exceeds Rs. 1 Lakh (currently 1.1 lakhs). In your case you would need to draw up a P&L statement and determine the net taxable amount and then see if you are liable to file returns. Even in a situation that you are needed to file returns currently due to the time barring provisions, you would be eligible to file returns for Financial year 2005-06 and 2006-07. Yes you could apply for a PAN without any inhibitions of the taxman coming back to you for the past unless there is sizeable amount of income that has been concealed.

Fool asked, My company is listed overseas. I had been allotted stock options in 2005. I sold them last month overseas itself and received the money as well. Since I have held it for more than 2 years and then sold, will LONG TERM CAPITAL GAINS tax be applicable for this amount?

Mahesh Padmanabhan answers, In the case of capital asset mentioned by you, the same would be classified as long term only if you hold the asset for more than 3 years. Hence you are liable to tax on short term capital gains.

Satish asked, Hello Mahesh, I am a software professional from last 7 years, recently I have been allotted with some ESOPs for which I am supposed to pay fringe benefit tax, I was going thru income tax website where I cam across a notification saying the rule regarding FBT will be effective from 1 April 2008. If so, should I pay FBT for the ESOPs that have been alloted now?

Mahesh Padmanabhan answers, You must note that you are not liable to pay FBT. It is your employer who is liable to pay Fringe Benefit Tax.

lo asked, goodday to u! im 30 year old man working in a Private Organisation earning 25000 p.m, i fall in the tax bracket.would u kindly advise me as to how much exemption women are entitled to and im interested in investing through SIP in ELSS for saving my taxes. please advise which schemes to choose and how much should i invest to save taxes and make money? my income is 320000 pa.thank you very much.

Mahesh Padmanabhan answers, Women are entitled to a base exemption of Rs.1,45,000 from the current year. In addition to base exemption, you can save taxes by investing in specified channels.You can save taxes by investing up to Rs.1,00,000 in streams such as Life Insurance, PPF etc.

gaurang asked, I have not filed my personal IT return. Will there be any penalty? I hv to pay some tax also on it.

Mahesh Padmanabhan answers, You will have to pay your taxes along with interest for late payment as well as late return filing.

manish asked, Hi sir, I have had some losses in august 2007 in F&O trading. Can i deduct this amount from annual income while filing the annual return next year(2008)?

Mahesh Padmanabhan answers, You can set off the losses from your business against any other income for the current year except for salaries. However, if you do not have any other income in the current year, then you can carry forward the losses and set them off against income from the business for that assessment year. You can carry forward the losses up to a period of 8 years provided the losses are non-speculative.

jerin asked, i pay 60,000 rs per annum as my House loan will this full amount can be claimed for tax DEDUCTION UNDER SECTION 80C?

Mahesh Padmanabhan answers, You can claim only the principal component of your EMI under Section 80C. But you can claim the interest component u/s 24(b) as losses from House Property.

ritesh asked, Hi, How PPF can be good for tax savings?

Mahesh Padmanabhan answers, PPF is a good tax saving option since the amount invested inPPF is deductible under Section 80C.

deep_1978 asked, Hi, on my PAN card my name is deepika singh & now after marriage on my marriage certificate my name is same but I chaged my name to deepika chauhan (my husband's sir name) at my employer's place. Please suggest what I should do now? regards, deepika.

Mahesh Padmanabhan answers, You will have to make an application for amendment of PAN in Form 49B

parag asked, Is profit made through selling of share applicable for income tax and Captial gain tax?

Mahesh Padmanabhan answers, Capital Gains tax forms a part of your Income Tax.

Mahesh Padmanabhan says, Thank you Friends. I am signing off for the day. I look forward to answer your queries in the next session. Bye.

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