Regulations – Dutch Uncles

Facts About LRS That Every Investor Should Know

Aakash Sharma — Thu, 14 Oct 2021 03:35:11 +0000

Whether you plan to invest in foreign markets, take a vacation abroad, or send your children outside India to study, the RBI’s Liberalised Remittance Scheme (LRS) can help you solve all your currency-related concerns. In addition to remittances and transfers, you can use foreign exchange facilities covered under the LRS.

The Reserve Bank of India (RBI) oversees the Liberalised Remittance Scheme. The scheme allows resident individuals to pay for international investments and expenses in one fiscal year. An individual is said to be a resident in the tax year for 60 days or more in India in the relevant tax year and a total of 365 days or more in the previous four tax years.

Current laws and regulations allow residents to transfer up to $250,000 per tax year. They can use the money for travel expenses (personal or professional), medical care, studies, gifts and donations, care of relatives, etc.

The remitted funds can also be used to purchase stocks, bonds, and real estate in foreign markets. Individuals may open, manage, and maintain foreign currency accounts with banks outside India to complete program-approved transactions.

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As the name suggests, the liberalised remittance scheme (LRS) is formulated for the remittances (investing in foreign lands) that a resident individual is permitted to make.

However, trade in foreign entities, including buying lottery tickets, proscribed magazines, etc., or any items prohibited under Schedule II of Foreign Exchange Management (Current Account Transactions) Rules, 2000 is not allowed. Resident individuals cannot, directly or indirectly, send remittances to countries designated by the Financial Action Task Force (FATF) as non-co-operating countries and territories.

LRS and international transactions

Before international trade and transactions, you need to convert the Indian rupee into US currency for foreign investment or consumer purposes. The Liberalised Remittance Scheme describes how these transactions work. As an Indian resident, you must purchase dollars using the Indian rupees (INR) from an authorised dealer (the bank) in India.

The dollars can then be remitted or spent abroad for buying property or diversified assets like equity dividends. Here, the allusion of the dollar as a currency is easier as remittance can be in any openly adjustable foreign currency, including dollars.

Types of LRS transactions

LRS current account transactions

If you are engaging in international travel, the foreign exchange facility determines if LRS is allowed for you. In addition to remittance, you also have the forex facility at your disposal for specific purposes. These are referred to in Paragraph 1 of Schedule III of FEM (CAT) Amendment Rules 2015, which consist of the rules for the period of the surrender of foreign exchange. The individual must maintain the usage of forex within the limit of $2,50,000 only.

Purposes for which LRS can be utilised under current account transactions

- While making a private visit to any country except Nepal and Bhutan, this facility could be availed. You can use your credit card and ATM cash withdrawals if the card allows international transactions.
- Travelling for business or attending a conference or specialised training abroad are also legitimate reasons for this transaction.
- Medical overheads abroad or accompanying a patient going abroad for medical treatment/ check-up.
- It covers the costs of education/studies abroad and employment opportunities.

All such transactions are under the purview of current account transactions. In addition, the Authorised Dealer (banks) can initiate the remittance without RBI’s permission if the transactions are not listed in the prohibited category. However, the person remitting the funds must bear the responsibility to comply with the Foreign Exchange Management Act (FEMA) rules.

LRS capital account transactions

LRS rules define transactions such as investing abroad in shares, property etc., as capital account transactions. Only specific capital account transactions are allowed under LRS rules.

Purposes for which LRS can be utilised under capital account transactions

- Opening a bank account abroad, i.e., a Foreign Currency Account is covered.
- Purchase real estate property overseas can be done under this form.
- For making investments overseas, including investing in shares, mutual funds, debt instruments, etc., LRS can be used.
- It can also set up Wholly Owned Subsidiaries and Joint Ventures outside India for business operations.

Retaining and reinvesting the funds

When you invest in stocks and investments overseas, LRS rules allow you to hold and support your profits in that country (unless it is an overseas direct investment). Investing abroad and accruing interest or dividends on the deposits and investments made abroad do not need to repatriate. This allows you to retain the premium earned on your stocks or interest earned from the assets held as bonds and other foreign securities.

This type of earned income can then be utilised to reinvest or to fulfil other expenses abroad. Gains from investments in real estate and ETFs can be reinvested in foreign markets without sending it back to the domestic bank account.

LRS limits

Currently, all residents, including a minor (countersigned by an administrator), can remit up to 2.5 lakh US dollars (USD 2,50,000) per year, according to the Liberalised Remittance Scheme. At the exchange rate of Rs 76 for a dollar, the limit is about Rs 1.90 crore. There is no limit to the number of annual transactions. Even if one sends the remitted amount back in the same year, no further remittance is permitted as the limit is set for individual fiscal years.

The post Facts About LRS That Every Investor Should Know appeared first on Dutch Uncles.

Security Ban: All You Need To Know

Aakash Sharma — Tue, 12 Oct 2021 03:35:08 +0000

When the open interest of market-wide position limit (MWPL) for a stock surpasses 95%, the stock comes under a ban in the futures and options (F&O) division. The open interest combines the total F&O contracts for all the months.

If a security comes under the trading ban, you can only square off the position of that stock holding in futures and options. You cannot open new places either in futures or in options if a trading ban is imposed.

Market-wide position limit (MWPL)

Market-wide position limit (MWPL) is a limit that shows the maximum number of unsettled option contracts for a derivative stock. Currently, the MWPL for Indian derivative stocks is 95%.

If the open interest of a share’s MWPL is greater than 95 per cent, the share is banned from trading in the futures and options market. Open interest is the final number of outstanding obligations held by market members at the end of each day. Open interest measures the fundamental level of activity in the futures market.

The concept of market-wide position limit is applied to securities in the futures and options (F&O) section. Every month, the stock exchange publishes data for MWPL of each security in the F&O section. Index derivatives are not subjected to the MWPL.

The MWPL of securities should be:

- Less than (or equal to) 20 per cent of the free float stock, and
- Thirty times the previous month’s average quantity of stocks regularly traded in the exchange’s cash market.

The National Stock Exchange (NSE) gives a trading system that notifies when the open interest of futures and contracts in security exceeds 60% of the security’s market-wide position limit. These notifications are highlighted at the 10-minute time frame.

Exemplified explanation of market-wide position limit (MWPL)

To understand the securities ban, it is essential to grasp the basics of market-wide position limit (MWPL). MWPL is determined by calculating 20% of the free float market cap of a company.

Suppose a company has a 10 crore net share volume. From this market cap of shares, five crore shares are held by promoters and thus form the restricted stock. The remaining stock of five crore constitutes the free-float market cap, which is open for trade on the free market.

Taking the above example, 20% of the free float market cap will be,

20% x 5 crore = 1 crore

Therefore, the company’s market-wide position limit is 1 crore shares.

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20% of the free float market cap is called the market-wide position limit (MWPL). When MWPL-to-open interest crosses 95%, a trading ban is imposed on a share for the next trading session. The ban continues until the MWPL comes below 80%.

During Security in Ban

When security is under the ban, the only transaction that traders can do is reducing their position. They can reduce the place by selling the original position. To put it simply, you cannot open a new position until the security ban is lifted in F&O Segment. However, traders may opt for intraday positions as it is not related to open interest.

Why is a ban on securities imposed?

The vital reason why exchanges impose a ban on security in the F&O segment is to reduce the volatility in particular shares on both sides. The ban saves retail investors from significant losses. It also gives time to investors for rethinking their positions. Traders are not permitted to open any new positions in securities during a ban period. But they can exit already opened positions.

Penalty for breaching the ban

If a trader breaches the F&O ban, i.e., raises or opens a new position in security during the ban period, they are levied a fine of 1% of the rising position’s value. The lowest penalty limit is set at Rs 5,000, and the upper limit is Rs 1,00,000.

Ban resumption and normal F&O trading

After the ban, regular trading in securities only resumes when total open interest on all exchanges comes below 80% or less of the MWPL. In simple terms, when the open interest drops to 80% or less, stocks come out of the ban, and regular trading resumes.

Suppose a company’s market wide position limit is 80 crore shares and open interest is 78 crore shares. By calculating the percentage, i.e.,

- {Open Interest / MWPL} x 100

{78 / 80} x 100 = 97.5,

The open interest comes out to be 97.5%. As the percentage is above 95%, the ban will remain on the company’s securities. It will only come out of the prohibition if the rate slips below 80%.

So, if the open interest reaches, say, 60 crore shares, which will mean

60/80 x 100 = 75%.

Thus, the share will be under 80% and will come out of the ban.

In the end, it is essential to remember that securities in the F&O segment that enter a ban period are the ones that are highly speculative and risky. Such shares are not a promising investment choice, especially for retail investors just beginning their investment journey. Still, even if you have entered such a risky transaction, you can trade the stock in the cash segment, where no such limits apply.

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NSDL vs CDSL: A Basic Guide For Beginners

Aakash Sharma — Thu, 07 Oct 2021 08:35:08 +0000

As an investor, you need to understand what depositories are and what is their role in the stock market. They are, after all, the most fundamental players in the market’s functioning. Depositories are entities that hold your shares or securities in electronic or intangible form (dematerialised format). They guard and store any type of stock market security.

There are two major depositories in India: National Securities Depository Limited (NSDL) and Central Securities Depository Limited (CDSL). These two depositories facilitate your Demat transactions and make trading in the stock market easier. Opening a Demat account and a trading account is imperative for starting the investment journey. And these depositories are responsible for the opening and management of your accounts.

Understanding depositories

Both National Securities Depository Limited (NSDL) and Central Securities Depository Limited (CDSL) are depositories that maintain stock market participant’s financial records. They communicate with investors through Depository Participants (DPs). The DP acts as the intermediary’s representative between depositors and their clients. DPs are authorised by a depository under the relevant legislations of the SEBI Act.

You need to open a Demat account to use depositories’ financial services. Usually, depository participants are the brokerage and trading platforms like Zerodha, Upstox, Groww, etc. These companies provide the demat account opening services along with market activity reports and other value-added services.

National Securities Depository Limited (NSDL)

The National Securities Depository Limited is affiliated to the National Stock Exchange (NSE). NSDL is the oldest and largest depository of electronic securities in India. It was established in 1996 and is based in Mumbai, Maharashtra. It is the first depository in India to exchange and pay for securities electronically or in Demat form. NSDL has around 1.7 crore investor accounts and 30,500 points of service in 2000 cities.

Central Depository Securities Limited (CDSL)

Central Depository Securities Limited (CDSL) trades on the Mumbai Stock Exchange (BSE). CDSL is the second depository of securities in India after NSDL. It was set up in 1999 in Mumbai. It is the second largest securities and stock market accounting depository in India. CDSL operates over 19,000 DP service centres with investor accounts of approximately 1.6 crore people.

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NSDL and CDSL hold various bonds and electronic securities in different segments such as stocks, cash, and assets. Both are government registered entities.

How do NSDL and CDSL work?

When you start trading in stocks and shares, they are debited or credited respectively from a depository and shown in your Demat account. Once the transaction has been validated, depositories shall provide the public company with information about the shareholders. For example, investors can receive delivery instructions from the depositories, among other actions. On the other hand, companies that trade on the stock exchange often contact depositories regarding information of shareholders for actions such as notifying them about their right to profits, shares, etc.

Transforming stock market investment

The depositories have transformed trading in Indian stock markets by making it possible to hold and trade stocks, securities etc., electronically. By using technology, they have paved the way for secure, reliable and convenient transactions in the stock market.

Which is better – NSDL or CDSL?

There is no significant difference between CDSL and NSDL’s working domains. Both depositories are registered with the Indian government, regulated by the Securities and Exchange Commission of India (SEBI), and provide electronic copies of the securities to investors.

On the customer side, depository services keep evolving. The question of superiority is thus rooted in an investor’s preference of the stock exchange they want to indulge in, i.e., either the National Stock Exchange or the Bombay Stock Exchange.

Moreover, the investor does not have the liberty of choosing the depository they want to open their Demat account with. The decision of choosing the depository lies with the brokerage firm or the agent. A broker or depository participant selects either NSDL or CDSL by analysing which depository will be more economical and conveniently accessible to open a Demat account.

For clients, the brokers can debit or credit securities from either of these depositories, given that they hold valid power vested in them by an attorney permitting them to do so.

Investor’s concern

There are no major concerns for investors regarding the depository with which their account gets registered. However, some brokers outline specialised benefits in opening CDSL or NSDL accounts as further leverage. This is just a marketing ploy to get you to create an account with them.

As an investor, you can easily open a Demat account and a trading account, with a DP linked to one of the depositories. If you are starting your investment journey in the stock market, never forget to choose a trusted and reliable broker. Always look for features like a free online Demat account and no annual maintenance fee (AMC). They can offer you the most advanced trading platform and the best Demat services.

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ELSS: Is It Really A Top Tax Saver?

Aakash Sharma — Thu, 30 Sep 2021 03:35:08 +0000

The Equity Linked Saving Scheme, or ELSS, is a mutual fund programme that primarily aims to provide tax benefits on stocks market investments. Under the Income Tax Act Section 80C, investments up to Rs. 1,50,000 in ELSS mutual funds are tax-deductible.

The main advantage of ELSS is the shorter lock-up period of three years compared to other tax-saving instruments. This means that you cannot sell your ELSS investments for three years from the date of purchase. However, to get the most out of ELSS funds, keeping your assets for as long as possible is advisable.

If you are a subscriber of an ELSS Systematic Investment Plan (SIP), each plan payment will have a lock-in period of three years. This means that each of your SIP investments will have different maturity dates. Most of the assets of ELSS mutual funds (65% of the portfolio) are allocated to listed equities and securities. They may be exposed to fixed-income entities as well.

ELSS Mutual Funds – a preferred tax-saving option

ELSS offers additional benefits on your invested money by giving tax breaks as well as helping you save money over time. The ELSS investment only has a three-year lock-in period, the least among all tax-saving entities, and has the highest returns under the 80C option.

Features of ELSS fund scheme

Following are the key attributes of ELSS mutual funds.

- Under the Section 80C provision, ELSS funds grant tax deductions up to Rs. 1,50,000 per year.
- The ELSS period is accompanied by a blocking period of three years, with no early departure possible.
- You can invest any amount in ELSS. There are no restrictions, with the exceptions of different limits for individual mutual funds.
- ELSS funds are the only tax-efficient investments that can have inflation-beating returns.
- An investment in ELSS funds can offer you tax holiday and added-value advantages.
- ELSS’s corpus consists primarily of stocks, although they also have exposure to fixed-income securities.

Factors to consider before investing in ELSS

It would help if you considered the following factors while choosing to invest in an ELSS mutual fund:

- Investment perspective

If you choose to invest in an ELSS fund, your plan should include keeping the money in the scheme for at least five years. A long-term investment perspective is imperative for ELSS fund investments as they require a more extended investment period to tackle stock market volatility.

- Returns

You should understand that ELSS funds do not offer a guaranteed return as they are entirely dependent on the performance of the underlying securities. However, an ELSS investment period of more than five years can provide a higher return than any other tax-saving investment opportunity.

- Locking period

As told above, the minimum locking period for the ELSS investment fund is three years. Your investment is closed for three years from the investment date, and you cannot withdraw your money before the end of this period.

Advantages of ELSS Mutual Funds

ELSS advantages consist of the following heads:

- Potentially high yield

Apart from ELSS, where investment returns depend on the market, other 80C instruments such as PPF or FD are capped income products. ELSS can generate significantly more capital in a long-term investment plan over others in the segment.

- Good after-tax income

The long-term capital income arising from ELSS is tax-free up to Rs. 1,00,000. Income above this limit is subject to a 10% tax rate. The mix of lower tax rates and higher returns ensure the best post-tax returns.

- Easy investment

Sustainable ELSS investment is straightforward. It is easy to invest in ELSS through monthly SIP.

Disadvantages of an ELSS fund

Despite its benefits, ELSS has some cons as well, which include:

- The overall benefit is limited

Tax deductions for a given fiscal year are only available up to Rs. 1,50,000 under 80C, regardless of the total amount invested in ELSS funds. For example, if you invest Rs. 15,00,000 in an ELSS fund in a fiscal year, the benefits will only be given on the capped amount of Rs. 1,50,000.

- Tax incentives are limited

The 80C tax incentives on yield up to Rs. 1,50,000 includes all the avenues like PPF, life insurance, mortgage repayment, etc. It means that you can have no tax deduction benefits by an ELSS fund investment if other avenues make the threshold amount of Rs. 1,50,000.

In conclusion, investment in ELSS should be a function of an investor’s risk-return appetite, investment objectives, and investment duration, accompanied by an intelligent understanding of the concept.

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Association of Mutual Funds in India (AMFI): The Referee for Mutual Funds

Aakash Sharma — Tue, 28 Sep 2021 03:35:09 +0000

The Association of Mutual Funds in India – AMFI – is an industry organisation established in 1995 for managing the Indian investment funds segment. Most Indian mutual fund managers and companies are members of AMFI. The organisation strives to develop the Indian investment fund market and maintain ethical and professional standards.

AMFI is a government non-profit organisation supervised by the Securities and Exchange Board of India (SEBI). SEBI incorporated it on 22 August 1995. As of April 2015, AMFI had 44 registered members. AMFI members are the asset management companies that are registered with the organisation. These members have collective assets under management (AUM) worth over Rs. 27 lakh crores.

Objectives of Association of Mutual Funds in India (AMFI)

AMFI is a self-regulatory agency established collectively by Indian fund houses and asset management companies (AMC). It is an institution entitled to supervise the activities of investment funds and the financial management of investors.

The mutual funds’ sector in India is still an underdeveloped financial domain. There have been many misconceptions and fears regarding the stock market and investment funds due to the lack of awareness and financial education.

The lack of knowledge initially hindered even minor participation in the mutual fund investment segment. Therefore, over the years, regulators such as SEBI and AMFI have become active and are playing an essential role in investing in financial education.

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The Association of Mutual Funds in India protects the interests of investors and financial management companies.

Role of AMFI: Creating investor awareness

AMFI is involved in developing a clear and transparent framework for the Indian mutual fund arena. Over decades, it has been an instrumental player in protecting the interests of investors and fund houses. It has made financial investments easier and more transparent to appeal to more people.

All fund houses, trustees, agents (intermediaries) and financial advisers have to register with AMFI. It presently has 44 members, including 42 SEBI-registered asset management firms. The Association of Mutual Funds in India’s foundation advocates for risk-free mutual fund investments and highlights the benefits of investing safely.

The Association of Mutual Funds in India aims to:

- Demonstrate ethical and uniform professional standards in all member organisations under AMFI.
- Encourage members and investors to comply with business rules and guidelines.
- Get advisories, AMCs, distributors, agents, and other entities included in the capital market or financial service areas to comply with their guidelines.
- Act as a bridge between SEBI and members and ensure that SEBI’s financial instructions are followed.
- Represent the Reserve Bank of India, Finance Ministry, and SEBI on everything related to the industry.
- Educate the public on investment opportunities and benefits.
- Disseminate information on partnerships, as well as research and training in various contexts of mutual funds.

AMFI reviews the Code of Conduct rules and takes disciplinary action if its members violate the law. Mutual fund investors may contact AMFI to file a complaint and register their grievances against a fund manager or house in case of an irregularity.

AMFI Registration Number (ARN)

The AMFI Registration Number (ARN) is a unique number assigned to financial agents, distributors and other financial market participants who act as brokers. It can only be attained by National Institute of Securities Markets (NISM) certified personnel or entities. If you are a senior citizen, qualifying for the CPE (Continuing Professional Education) is compulsory. Without this number, you cannot sell or trade any mutual fund.

AMFI offers ARN ID cards to companies and resellers operating in mutual funds trade. Please note that the NISM certificate is only valid for three years. This certificate includes AMC name, cardholder’s photo, AMFI Registration Number (ARN), and business address. It helps investors verify the legitimacy of brokers or AMCs

ARN important is extremely important for investors

Financial market middlemen such as brokers, agents or intermediaries play an essential role in attracting potential investors for mutual funds. To ensure that only eligible people can sell, participate in mutual fund trade and engage with potential buyers, AMFI only authorises individuals or organisations with an AMFI Registration Number.

All external applicants must register and pass the exams to become an AMFI entity of advisors. Never engage with an intermediary that does not have ARN while investing in mutual funds. Before you start investing money, you need to verify the AMFI registration number of your broker.

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What is the Capital Gains Account Scheme (CGAS)?

Aakash Sharma — Mon, 27 Sep 2021 05:35:11 +0000

The Indian government instituted the Capital Gains Account Scheme (CGAS) to encourage investors to reinvest their capital gains made in the market in different avenues. The scheme gives tax benefits to investors who invest their capital gains into specified assets (accounts) provided under the CGAS. The plan is listed under sections 54 to 54GB of the Income Tax Act 1962, which has provisions for exemption from capital gains.

In some cases, taxpayers are unable to reinvest the capital gains in modes specified in the law before the filing of return of income or before the end date of profits investment. Thus, the government introduced the Capital Gains Account Scheme to enable taxpayers to park their funds till they are spent on the prescribed plan.

What is Capital Gains Tax (CGT)?

Earnings generated from the sale of capital assets are termed capital gains. Gains from the trade of capital assets are taxed in the income tax proceedings. Capital gains arise for a transaction where you trade the asset for a higher price than its buy price.

Types of Capital Gains Tax

Capital assets are generally divided into short-term and long-term capital assets.

- Long-term Capital Asset

Long-term capital assets are the assets that are held for more than 12 months. In India, the tax for long-term capital gains in stock markets is set at 10% of the profit volume.

- Short-term Capital Asset

Short-term capital assets are the assets that are held for 12 months or less. These gains are taxed at 15% in stock market gains.

Capital Gains Account Scheme

The time available for the beneficiary to reinvest and avail of the exemption is longer than the due date to register the return of assets. In this case, the taxpayer can deduct unused capital gains in the “Capital Gain Account” under the Capital Gains Account Scheme. Capital gains invested in the capital gains account are exempt from taxation and are treated as reinvested gains.

Availing Capital Gains Account Scheme benefits

Taxpayers who are unable to reinvest their investment income in a particular tax-exempted avenue before filing tax returns are eligible for CGAS. Before reporting it in income tax filings, taxpayers must bring in the investment income that was not used for re-investment purposes. This must be done before the tax filing deadline. Capital gains account can be opened for additional capital benefits at any branch of a public bank, except in rural areas where banks are not empowered with such features.

Procedure to open capital gains account

You can open a capital gains account with your bank and apply via Form A. Information such as PAN details, proof of address, and photograph is required for the opening process. You can make deposits in many ways, such as cash, check, demand draft, etc. You can make the deposit either in lump sum or instalments. Separate applications shall be made for exemption under different sections, and you must open individual capital gains accounts.

Types of deposits

You can make two types of deposits under the capital gains account scheme.

- Type A – Savings deposit

Type A account is like a regular savings bank account of any bank where interest at a rate similar to saving bank account interest is credited periodically. The bank also issues a passbook to the deposit holder. Like the savings deposit, a Type A account offers better liquidity, and you can withdraw at any time.

- Type B – Term deposit

Type B account is similar to a bank’s fixed deposit account that offers interest at the rate applicable to a term deposit. It has restrictions identical to a term deposit. The maximum term allowed for a Type B account is three years. The depositor is required to choose the time based on his plan for specified investment, such as two years for the purchase of new house property or three years for construction. Like fixed deposits, depositors receive a deposit certificate containing all the deposit details. It has to be tendered at the time of withdrawal. Moreover, auto-renewal of term deposit is not permissible as a standard fixed deposit.

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The term deposit can be calculated on a cumulative or non-cumulative basis; interest is either consolidated and reinvested with the principal or paid out periodically.

Withdrawal from the scheme

You shall submit form C for withdrawal from an account for the first time and Form D for further withdrawal transactions. These are subject to furnishing the details of the manner of utilisation of money withdrawn previously. Hence, no debit card or chequebook is issued to the depositor.

There are no restrictions on using the Type-A account for withdrawing money. While the right to withdraw money from a Type-B account is granted, it is only allowed if the money is transferred to a Type-A account and then withdrawn. Failing to adhere to this rule levies penalty on the account holder. The individual amount withdrawn is expected to be utilised for designated purchase within 60 days of withdrawal, and any unutilised amount may be re-deposited to the Type A account immediately.

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Long-Term Capital Gain Tax (LTCG): Explained

Aakash Sharma — Fri, 24 Sep 2021 05:35:09 +0000

Long-term capital gains (LTCGs) are the realised profits on investments that have been held for more than 12 months at the time of sale. Profits on security holdings that are less than one year old are known as short-term investment gains. Long-term capital gains are generally taxed less than short-term capital gains.

Long-term capital gains (LTCG) on equity

The long-term gains from the sale of public shares and equity-based mutual funds used to be outside the purview of taxation before 2018. But the introduction of Section 112A in the Finance Act, 2018, following the year’s union budget, mandated levying the LTCG tax on such assets. However, the new legislation provided tax exemption on long term capital gains up to Rs 1 lakh. Any amount exceeding this limit is taxed at 10%.

Important things to know about the long-term capital gains tax rules in India

- The 10% taxation of long-term capital gains (LTCGS) started from 1st April 2018.
- Long-term capital gains tax is applicable on profits from shares and mutual funds held for over one year (365 days).
- LTCG tax is applicable on Equity Linked Savings Scheme (ELSS). Unit Linked Insurance Plans (ULIPs) are exempted from this tax practice.
- Indexation benefits, which help generate inflation adjusted returns, are not applicable for LTCG taxation, unlike real estate.
- LTCGs up to Rs. 1 lakh are entirely tax-free.
- Securities Transaction Tax (STT) must be paid along with LTCG tax.

Understanding the Long-Term Capital Gain (LTCG) tax

The long-term capital gains are figured out by the difference between the selling price and the purchase price. This number tells whether you have made a net profit or a net loss on the sale of your invested assets. As a taxpayer, you are legally bound to declare the total capital gains for the fiscal year because capital gains are considered as taxable income.

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Due to changes in the tax laws in 2018, long-term capital gains are taxed at a lower rate of 10% compared to the 15% of short-term capital gains.

In terms of capital losses, both short-term and long-term losses play an essential role in helping investors reduce taxes. Investors can use the tax-loss harvesting techniques to offset gains and pay fewer taxes on capital gains in the long and short term.

A working example of long-term capital gains tax

For the calculation of capital gains, the government introduced the Grandfather Concept. Under it, 31st January 2018 was chosen as the base date for deciding the fair market value of equity (share price/Net asset value) for LTCGs. This meant that the net asset value (NAV) or share prices were calculated with 31st January 2018 as the reference date.

The move was introduced to delineate the cost of acquisition of holdings concerning historical costs and fair market value (or the current price) of securities. The historical cost is related to the actual price when a transaction is executed.

On the other hand, fair value refers to the real value of an asset in the current market. The higher of these two costs is used as the basis for calculating capital gains.

Suppose you bought shares worth Rs. 3 lakhs on 1st September 2020. After holding your shares for over one year, you decide to sell them at Rs. 5 lakhs on 31st September 2021.

Since you have held the stock for over one year (1st September 2020 to 31st September 2021 > 1 year), the profit on this transaction will be a long-term capital gain.

On the sale, you will receive a profit of => Rs. 5 lakh – Rs. 3 lakhs = Rs. 2 lakhs

As the profit has occurred over the long term, the LTCG tax will be applied to it. The taxation rules state that the first Rs. 1 lakh gains are untaxable. So, your LTCG tax will be calculated on the rest of the profit, which is,

Rs. 2 lakh – Rs. 1 lakh = Rs. 1 lakh (1,00,000)

Thus, your LTCG tax will be 10% of 1,00,000 = Rs. 10,000

In the same example, consider a case where your profit is less than Rs. 1 lakh. You bought the shares at Rs. 3 lakhs, and after one year, you sell them at Rs. 3.8 lakhs

Gains = Rs. 3.8 lakhs – Rs. 3 lakhs = Rs. 0.8 lakh (or Rs. 80,000)

Here too, the LTCG tax will be applied as the holding period is over one year. But the levied LTCG tax here will be 0 as the minimum limit for LTCG tax is Rs. 1 lakh. Any equity gains below this amount are not taxable.

Exemptions

In the case of the sale of shares, you may be allowed to deduct these expenses:

- Broker’s commission related to the shares sold
- STT or securities transaction tax is not allowed as a deductible expense

But in general, long-term capital gains on security holdings and trades are not exempted from tax. However, as mentioned above, LTCG tax is not levied up to the Rs. 1 lakh profit mark. Individuals in specific income levels can be exempted from paying income taxes for short-term capital gains on shares.

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Is Tax-loss Harvesting Strategy Beneficial?

Aakash Sharma — Mon, 20 Sep 2021 05:35:08 +0000

Tax-loss harvesting is a fundamental strategy for reducing tax payables and increasing capital gains by paying less in taxes. This strategy is provided for the benefit of investors and traders by the law to reduce the tax outgo on realised gains before the end of a financial year by booking a sell order on loss-making stocks.

One of the most critical aspects of tax-loss harvesting is: does it help increase return on investment? The simple answer is yes. As it helps you cut down the payable tax, it automatically enhances post-tax capital gains. Let us dive further into why it is a widely used practice in Indian securities markets and what can be the ups and downs of this tax-saving process.

The lack of wash sale rule in India

One factor that makes tax-loss harvesting profitable in India is the lack of legislation for wash sales. A wash sale proceeds when you sell a security at a loss and repurchase it or substantially identical security shortly before or after.

Technically, the wash sale rule is an American regulation that applies only to the United States securities market. Under the US wash sale rules, investors cannot use the loss accrued from a sale to set off their capital gains and reduce the tax liability.

Unlike the US, there is no provision for wash sales in India, which means that Indian investors and traders can use it to reduce tax losses without any consequences of reprimanding action by the tax authorities.

Example

Sample this. You hold a share of Vodafone-Idea. Suppose the share price drops from Rs. 100 (your buy price) to Rs. 60, meaning that you currently have an unrealised loss of around Rs. 40.

At the same time, you also hold a share of HCL Technologies. Assume that the share price of the HCL stock has risen from the buy price of Rs. 2,000 to around Rs. 2,100. Now, you have an unrealised profit of around Rs. 100. You subsequently decide to sell this share for a profit of Rs. 100.

Now, the profit of Rs. 100 is the capital gain on which you are required to pay tax. However, to reduce the tax liability, you also sell off the Vodafone-Idea share that you had for Rs. 60. This way, you can effectively make a loss of Rs. 40 on this transaction, and the tax will be levied on Rs. 60 instead of Rs. 100, thereby reducing your tax liability.

But then, you don’t wish to let go of the Vodafone-Idea share. And so, you simultaneously rebuy the share of Vodafone-Idea at Rs. 60. Such transactions are known as wash sale transactions.

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Reduced tax liabilities are undoubtedly the most prominent benefits of tax-loss harvesting. It not only helps investors but is also very helpful for traders.

Benefits of tax-loss harvesting for traders

For a stock market trader, every profit and loss in the market matters a lot due to the short-period nature of the trading activity. So if you have net realised business gain (short term capital gain, long term capital gain, Futures & Options profits), you are liable to pay up to 30% taxes on these gains.

However, you can deduct this tax liability by using tax-loss harvesting by realising the loss in trade transactions. With the sale of loss-making entities, which are giving either a short term or long term capital loss, you can reduce tax costs.

Once you sell the stock, you can either rebuy a similar stock instantly or wait for the stocks to go out from your Demat and then repurchase the same stock two days later.

Reorganise your portfolio

One of the best things about tax-loss harvesting is the ability to reorganise your portfolio. Reorganisation of the portfolio helps in improving the balance between wealth, profit and risk.

When indulging in refinancing via tax-loss harvesting, look at which holdings to sell or buy, and pay heed to the cost principle (the adjusted, initial purchase price). The cost basis will determine the capital gains or losses on each asset. The cost basis will determine the capital gains or losses on each asset. This method prevents you from selling only to realise a tax loss that may or may not fit your investment strategy.

Some downsides of tax-loss harvesting

Everyone wants to reduce tax payments on their hard-earned money and therefore look to tax-loss harvesting as a primary method. But assets that are down are not necessarily a bad thing in the stock market. If a down stock is the one that can provide diversification benefits and balance your long-term returns, such a stock strongly rings the buy bells.

Some experts consider tax-loss harvesting a fundamentally flawed approach as it involves selling loss-making stocks. Their sale can lead to the loss, although temporary, of important diversifiers in a portfolio for a relatively small tax saving.

Short versus long-term

As an investor, you need to look for long term benefits. And that sometimes includes buying into uncorrelated assets that have depreciated during a rapidly changing market regardless of the confidence one might have in the extension of equity increase.

Long-term losses on securities held for more than a year are generally netted against any long-term capital gains. In contrast, short-term losses on the sale of securities held for less than a year get applied to short-term gains, which are taxed at your higher ordinary income tax rate.

It is also essential to know that harvesting losses can add additional burdens, regardless of which tax bracket (10% or 15%) you belong to. To get the best possible benefits from your tax-loss harvesting, it is always advisable to consult an experienced financial advisor.

Since India does not have a wash sale rule, you can use wash sales transactions to limit your tax burden. However, you should carefully examine your overall returns because a careless strategy can lead to a net loss in the name of reducing tax burden through a wash sale.

In the end, the Indian financial markets and the laws regulating them give investors a fair chance to utilise the tax-saving benefit from tax-loss harvesting. Remember, the technique should be used as per your own goals, risk capability, financial knowledge, and with a greater understanding of the process.

The post Is Tax-loss Harvesting Strategy Beneficial? appeared first on Dutch Uncles.

What Is Tax-loss Harvesting?

Aakash Sharma — Sat, 18 Sep 2021 03:35:08 +0000

When you invest in equity-yielding financial securities like stocks and mutual funds, you make money in the form of capital gains over a specific period. The realisation of these capital gains, i.e., their encashment, becomes a taxable entity as it adds to your income stream. Capital gains are taxed according to the duration of your participation in the fund and market.

But there is one way that the law provides to reduce the tax burden on your investment gains; it is called Tax-loss harvesting. So, let’s delve into the details of tax loss harvesting and its various technical processes.

In tax loss harvesting, you sell your stocks/fund units at a loss to reduce your tax liability on capital gains. It is a method to offset the capital gains made on equity against the capital loss suffered to pay a lesser tax. Let us break down the process further, starting with the latest amendments in the law about the taxability of capital gains.

Tax amendments by the government on capital gains

Earlier, long-term capital gains from selling equity stakes and stock assets were completely tax-free for investors. However, amendments brought in by the 2018 union budget changed that. It got capital gains on the sale of listed shares and investment funds under tax purview.

Under the new rules, starting from April 1, 2018, long-term capital gains (LTCGs) above Rs. 1 lakh came under the 10% tax limit without indexing benefits. Indexing is used to change the purchase price of an investment to reflect the effect of inflation on it. A higher purchase price translates into lower profits, which means substantially lower taxes.

Indexing allows you to reduce the return on capital in the long run by reducing taxable income. But the new amends made such indexing benefits impossible. By law, short-term capital gains (STCGs) are taxed at the rate of 15%.

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As the taxation of capital gains on investments emerged, the law gave one option to investors for paying reduced taxes on such profits. This is where tax loss harvesting steps in - it can help you reduce the tax liability on both LTCG and STCG.

Tax loss harvesting

Tax loss harvesting is the method of trading financial security that undergoes a loss and helps you avoid some amounts of taxes, thus saving your money. By harvesting, i.e., realising losses, investors can offset their taxes on gains and income.

In tax loss harvesting, the shares must be withdrawn from the Demat account by a delivery sell transaction. You can purchase (or re-purchase) them the next day. The sold asset is substituted with a similar one, maintaining an optimal asset allocation and expected returns.

What does offsetting losses mean?

Offsetting in taxation processes means subtracting a capital loss from a capital gain and paying less tax. Simply put, the adjustment of losses against income or profit in a particular year is called set off.

For example, if you own two stocks and sell one at a profit and the other at a loss, you only pay capital gains tax on the difference between profit and loss. Losses not set off against income can be carried forward to subsequent years and used against income.

Usually, investors use tax loss harvesting for STCG because the tax rates on short-term capital gains are higher than long-term capital gains.

Realised versus unrealised gains (or losses)

A realised gain occurs when an investment is sold for a price higher than the buy price. Income from realised gains is subject to income tax. Depending on the time of holding, such profits are divided into short-term or long-term gains. Long-term gains are held for more than a year, while short-term gains are held for less than a year.

An unrealised gain is an increase in the value of investments that investors have not yet sold for money. On the other hand, an unrealised loss is a decrease in the value of an asset or investment that is held instead of its sale and loss realisation.

Example of tax loss harvesting

Suppose you earned Rs. 1 lakh in short-term capital gains this year. You will be taxed 15% or Rs. 15000 on this STCG. Assume that you currently have stocks holdings with an unrealised loss of Rs. 60,000. You can sell these stocks (and realise the loss) to reduce your net STCG to Rs 40,000

Realised gains – Realised loss = Net capital gain, i.e., Rs. 1,00,000 – Rs. 60,000 = Rs. 40,000.

As you realise the loss, you will have to pay 15% of Rs. 40,000, i.e., Rs. 6,000 as taxes. This will save you Rs. 9,000 in taxes. This method will let you harvest your losses and save on taxes – hence it is called tax-loss harvesting.

Mantras to remember while using tax loss harvesting

Now, you might wonder that your portfolio will reduce in size by realising the loss and selling the loss-making stocks. To counter this sale of stocks, you can place a simultaneous buy order of the same stocks or different stocks of a similar nature.

By using tax loss harvesting, you have realised the loss on the face. But with the simultaneous buy order, your portfolio will not get disturbed, and you will be able to save on taxes as well.

While setting off losses using tax-loss harvesting, you need to keep the following points in mind:

- You can only set off long-term capital loss against long-term capital gain. You cannot set off long-term capital losses against short-term capital gains.
- As an investor, you can set off short term capital loss against short term capital gain as well as long term capital gain.

Carry forward of losses

Unadjusted loss can still occur after making the necessary and permissible offset deals and adjustments. These unadjusted losses can be carried forward into future years to adjust for earnings. Different income origins have diverse rules regarding taking forward capital losses. You can move the loss forward for up to eight years after its assessment year.

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Here’s What You Need To Know About Contract Note

Aakash Sharma — Fri, 17 Sep 2021 08:35:12 +0000

A Contract Note is simply defined as confirmation of a sale of specified assets or purchase of securities between two parties. This is the legal record of all exchange transactions as per the bill of exchange. A contract note is a confirmation of a transaction made on behalf of the customer on a particular day on a stock exchange.

Contract note provides important details of transactions such as date, time, price, transaction size, among others. It also includes a reference number that you can use to check your trading data on the exchange.

Essential parts of a contract note

A valid contract note should have the following details in a structured format:

- The exact amount you have received/paid is stated at the bottom of the contract note. This amount is deducted from you and added to the list of registrations.
- Product details such as order number, trade number, and price, time of sale, traded security, service and quantity, brokerage fees, and other service charges
- Commercial trading member or broker affiliation details issued by SEBI
- Official signature (either digital or physical)
- Arbitration laws and regulations

The contract note clearly highlights the date, duration, and amount of the trade at the exchange done by your broker on your behalf. It also presents pre-contractual information and contains a reference number that allows you to verify information on stock transactions.

Importance of contract note

With a greater number of people participating in Indian financial markets as investors and traders, the likelihood of fraud and conflict has also increased. The Securities and Exchange Board of India (SEBI) has taken a number of measures to protect the general interest of investors.

The first step in this direction is the digital contract note, which contains the details about price, intermediary, cost of the service, and the Securities Transaction Tax (STT) in the prescribed format.

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By examining and possessing the contract note document, an investor can be sure that her/his order will be executed by the broker.

This document is a prerequisite for any legal action or arbitration against your agent in case of fraud or deceit. Experts suggest that you should ask your broker for the note on a regular basis to ascertain security and transparency.

Interpretation

The contract note you receive is a combined contract note which details the equity trades conducted on the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE), and futures and trading options (F&Os) on NSE.

Page One

- The exchange order number is displayed in the Order Number column.
- Order Time displays the timestamp of the order.
- Trade No. shows the exchange’s trade number.
- The Security/Contract column lists the stock/scrip in which the order was placed.
- Buy/sell indicates the nature of the transactions.
- The gross rate per unit shows the order’s execution price
- The net rate per unit column will be the same as the gross rate per unit and brokerage costs are listed separately in the contract note.
- For deferred derivative contracts, the closing price per share – the price at which the contract closed for the day – applies.
- Net total before levies shows the total amount due to you or from you before brokerage and taxes.

Page Two

- All the taxes applicable and brokerages, including SEBI turnover fee, Good and Services Tax (GST), Securities Transaction Tax (STT), stamp taxes, exchange transaction tax, etc. are listed here.
- The total amount payable or receivable is put at the table’s end.

The main purpose of contract notes is to calculate the net brokerage charges and profits on capital investments. You can also use it to calculate data for filing income tax returns. In short, contract notes are important for transaction validation and participating in financial markets securely.

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