How to reduce the Short Term Capital Gain Tax on Shares


We are in the month of March and it is the last month of this financial year. Hope you had a profitable year!

If that is the case, you will be paying tax on your profit and file the return, Isn’t It?. In this post we are going to explain a trick through which you can reduce capital gain tax on sale of shares, legally.

how-to-save-capital-gain-tax-on-sale-of-shares

Before that let us quickly understand how the taxes are calculated in India.

  Tax Implication for transactions carried out on Stock Markets 

Tax calculation are different for Investors and Traders.


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Investors: Investors have to pay 15% on Short term capital gain ( No tax on Long term Capital tax)

Traders: Traders have to pay tax as per the on going IT slab for the income from all the trading activities and salary (if any)

Let us understand with examples how tax can be saved in case of an Investor and a trader

  Example 1 : Investor

Mr. Salman is long term investor who buys and holds the equity shares for wealth creation. During April last year he had purchased shares of worth 1 lakh of “XYZ” company. Few days back, its value had increased to 2 lakh and Salman did in depth analysis to figure out that the value has peaked up and he sold them pocketing a cool 1 Lakh profit.

So Tax liability for Salman would be 15% of 1 Lakh profit = Rs 15000/-

Salman had also brought 1lakh worth of  shares of another company “ABC” at the same time of purchasing XYZ. But as on this March, its current market value has tanked to Rs20,000. But Salman is very confident of future growth potential of this company and dont want to sell a single share.

So, how can Salman save tax in the above scenario?

The trick is to sell shares of ABC before 31st March for Rs 20,000 and book a loss of Rs 80, 000. By doing this, Salman will be reducing the cumulative short term gain to Rs 20, 000 [ Rs 1,00,000 (Profit on XYZ) – Rs 80,000(loss on ABC) ]

New Tax liability for Salman would be 15% of Rs 20,000 profit = Rs 3,000/-

Now, since he believes in future prospective of ABC, all he has to do is to buy share of it worth Rs 20,000 again (after two days).

Yes, you see, Salman has cleverly saved Rs12,000 on tax by simply booking loss in ABC which otherwise he would have simply held it anyway.

This technique is called Tax Loss Harvesting in taxation parlance

  Example 2 : Trader

Mr. Kapil is active trader doing intraday and F&O trades regularly. He also carries out few positional trades spanning few weeks. He also purchased shares of companies ABC and XYZ at the same price as that of Salman.

After carrying out all the calculation about his trades including F&O and Intraday, he found out that his total taxable income is Rs 5,00,000 and he is in 30% IT slab

So Tax liability for Kapil would be 30% of 5 Lakh = Rs 1,50,000/-

Now, using above technique he did offset Rs80,000 loss resulting in taxable income as Rs 4,20,000.

Therefore new Tax that has to be paid would be 30% of Rs 4,20,000 =  Rs 1,26,000/-

Total Saving is Rs 1,50,000 – Rs 1,26,000 = Rs 24,000/- (Without much effort!!)

  What if my loss itself is more than the gain?

Suppose the loss which you are going to book is more than the profit you made, then you can offset the entire gain amount and also carry forward the remaining loss value upto next 7 consecutive years!

  What about Commissions?

Ofcourse, when you sell and buy back the shares are mentioned above, there will be some expenses you are going to incur such as brokerage charges, statutory taxes etc.  But there could be situations in which the reduction on tax will be more than these charges.

Thankfully there are some brokerage houses which charge zero brokerage for delivery transactions. These kind of brokers make this technique to click in a big way. At present brokerage firms such as Zerodha and RKSV are offering zero brokerage for all the investments. 

You can go through the review of these brokers below to understand it in detail.

Zerodha: Zerodha Brokerage Charges for various categories

RKSV : RKSV Brokerage Charges for Various categories

  How to identify this opportunity in your portfolio?

Identifying which share to sell to offset the tax gain is very straight forward. Simply find out the shares you purchased in this financial year which are making loss and just sell them.

If you have done too much transactions and finding it difficult, you can contact your broker and get their assistance.

In Zerodha Q, which is their backoffice, it creates a report like the one shown in below screenshot which will show you the possible tax Loss harvesting opportunity.

zerodha-tax-loss-harvesting-opportunity

If you are looking for more information about it, you can simply

   Is it Legal?

Offcourse it is!. All you are doing is just offsetting the gain with the loss and it is just treated as another normal transaction.

  Sharing is Definitely Caring!:

Hope the article was useful for you. you can find more such interesting and informative articles at our Archives page

Also Read : Details of 10 Best Online Discount Brokers in India

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