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Everything to know about Tax Gain Harvesting

While a lot is talked about Tax Loss Harvesting, not much is spoken about Tax Gain Harvesting. It is the practice of Harvesting your gains…especially your Long Term Capital Gains to save up to INR 10,000 in taxes every year. So how does this actually work? Let us find out

Understanding Taxation

Now, before proceeding with Tax Gain Harvesting, we need to understand the fundamentals of Long Term Capital Gain Tax

  • Long Term Capital Gains (LTCG) are taxed at 10% rate when STT is paid.
  • However, there is an exemption on LTCG Tax. The First Rs 1 lakh of LTCG when STT is paid is tax-free. Gains above INR 1 lakh will be taxed at 10% per year

    For example
    Your LTCG for the year is INR 2,00,000
    So, your taxable Income will be INR 2,00,000- INR 1,00,000: INR 1,00,000
    And, your taxability at 10% rate will be 10% of INR 1,00,000 : INR 10,000

So, what is Tax Gain Harvesting

Tax Gain Harvesting works by selling your profit-making securities and realising a Long Term Capital Gain of up to INR 1,00,000 in a Financial Year.

However, you will not have to pay any LTCG tax on your booked profits since it will be under INR 1lakh. So, now you reinvest the total amount i.e your initial capital + your profits back to maintain the portfolio.

As we already mentioned, by practising Tax Gain Harvesting you can save up to INR 10,000 every year. However, you will be able to enjoy this benefit only after your final exit from the market. 

There’s another way of Harvesting your gains and here the motive is to utilise the losses that can’t be carried forward.

As we all know that we can’t carry forward our losses for more than 8 years. So suppose you have certain losses that you can no more carry forward. To utilise those losses, you can choose to sell some profit-making securities in your portfolio and set off your losses against the realised gains to optimise your tax liability. 

You can harvest your Capital Gains to set off your F&O losses in the current year as well.

However, today we will be mostly talking about the first way of Tax Gain Harvesting.

Things to remember about Tax Gain Harvesting

There are certain factors that we need to consider before opting for Tax Gain Harvesting

  • In order to maintain continuity of investment, you need to reinvest in the market as soon as you redeem the older units for tax gain harvesting. However, it can be a challenge to buy back stocks or mutual funds at the same price at which you sold them, since prices change every second.
  • You need to have enough liquidity to reinvest quickly in the market . This is because settlement takes T+2 days.

Breaking down Tax Gain Harvesting with an example

So, for this example, consider yourself as an investor who has made an initial investment of INR 8,00,000 in an equity mutual fund in February 2019.

LTCG Tax Liability without Tax Gain Harvesting

Year 1
In March 2020 the value of your investment goes up to INR 8,50,000
So, your unrealised LTCG stands at INR(8,50,000-8,00,000) : INR 50,000.
You don’t realise your profit and stay in the Market.

Year 2
In March 2021, the value of your investment becomes INR 9,50,000
So now, your unrealised LTCG is INR(9,50,000-8,00,000) : INR 1,50,000.
Since your gain is unrealised, you do not have any Tax Liability.

Year 3
In March 2022, the value of your investment becomes INR 12,50,000.
So now, your unrealised LTCG is INR(12,50,000-8,00,000) : INR 4,50,000.

However, this time you decide to realise your gain and you sell your investment. So, as of March 2022, you have a realised LTCG of INR 4,50,000.

So, your Net Taxable income will be
INR 4,50,000 – INR 1,00,000 = INR 3,50,000

Accordingly, your LTCG tax liability will be
10% of INR 3,50,000 = INR 35,000.

So, after 3 years, will be having LTCG tax liability of INR 35,000

LTCG Liability with Tax Gain Harvesting

So, let us now understand the same scenario, with Tax Gain Harvesting

Year 1
In March 2020 the value of your investment goes up to INR 8,50,000
So, your unrealised LTCG stands at INR(8,50,000-8,00,000) : INR 50,000.

However, now you decide to Harvest your Gains. You Sell your investment and realise a gain of INR 50,000.

Your LTCG Tax liability is nil since the gain is less than INR 1,00,000.

You then reinvest the entire amount i.e INR 8,00,000 + INR 50,0000 = INR 8,50,000 back in the market.

However, the buying price now is INR 8,50,000

Year 2

In March 2021, the value of your investment becomes INR 9,50,000
Now, your unrealised LTCG is INR(9,50,000-8,50,000) : INR 1,00,000.

You again decide to harvest your gains of INR 1,00,000 by selling your investment

You now have a realised LTCG of INR 1,00,000. However, the Tax liability is again nil owing to the exemption limit of INR 1,00,000

You reinvest the entire amount of INR 8,50,000+INR 1,00,000 = INR 9,50,000
back in the market.

The INR 9,50,000 now becomes the new buying price

Year 3

In March 2022, the value of your investment becomes INR 12,50,000.
So now, your unrealised LTCG is INR(12,50,000-9,50,000) : INR 3,00,000.

Now, you decide to realise your entire profit and exit the market.

So now, your realised LTCG is INR 3,00,000.
Your Net Taxable Income will be INR 3,00,000 – INR 1,00,000 : INR 2,00,000

Accordingly, your LTCG tax liability will be
10% of INR 2,00,000 = INR 20,000.

So, at end of 3 years, you were able to save INR 15,000 with Tax Gain Harvesting, while enjoying the same returns.

So, will Tax Gain Harvesting become a part of your investment strategy? Share your thoughts with us.

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GST on cryptocurrency, Debut of Digital Rupee & everything in Between

If there was one major highlight of Budget 2022 for taxpayers, it was its verdict on crypto taxation. The Budget stated that gains from the transfer of Virtual Digital Assets (VDA) which include cryptocurrency, NFT & others would be taxed at a 30% rate.

Now, this was a bittersweet moment for taxpayers and crypto enthusiasts. Sweet because it cleared much of the mystery that crypto taxation was shrouded in. Bitter because…well 30% tax is steep, to say the least.

Also, just because income from cryptocurrency is taxable, doesn’t mean cryptocurrency is legal in India…not our words…that’s what our Finance Minister Nirmala Sitharaman said😅

GST on Cryptocurrency 

Now while the Budget did provide some much-needed clarity on Crypto taxes, it just dealt with one part of it. There are other crypto-related activities where the verdict is still ambiguous. For example, there is still a lack of clarity on how certain other activities like Crypto Derivatives trades, crypto skating would be taxed.

But looks like the government is gearing up to come down heavily on crypto allied activities too. Let’s take a look at the crypto exchange platforms for example. 

Rajya Sabha Member Sushil Modi has said that the government levies 18 % GST “only on service provided by the crypto exchange and is treating it as financial services.” However, in his opinion, cryptos are akin to gambling and betting and hence it should be treated similarly by imposing a  28% GST on the entire transaction of crypto.

Further, at the beginning of the year itself, we saw DGGI raiding Cryptocurrency exchange platforms like WazirX on grounds of tax evasion

Currently, the government is also mulling over imposing on GST on crypto mining. Mining is essentially the process through which new cryptocurrencies are introduced into circulation.

The cynicism regarding cryptocurrency seems to be quite widespread among the political and economic elites of our country. RBI Deputy Governor T Rabi Sankar believes that  Cryptocurrencies can wreck the banking system, undermine monetary policy and has even asked for an outright ban on cryptos altogether. Ouch! That Hurts

The steep taxation is definitely a step to dissuade people from indulging in cryptocurrency.

Looking at our portfolio, all we can say is at least we don’t have to pay taxes as long as we are in losses.😢

Enter Digital Rupee

However, what is interesting is that the government’s aversion to cryptocurrency doesn’t translate into its aversion to the technology behind cryptocurrency i.e. blockchain technology.

In fact, another key announcement made in Budget 2022 was that the government will be introducing CBDC i.e Central Bank Digital Currency or e-rupee using blockchain and other technologies.

We understand that this opens a pandora’s box of questions. What is CBDC, will it not be the same as UPI, is it going to be like bitcoin, ….the list goes on. Let us understand all these complex concepts one by one

What is CBDC?

To put it very simply, CBDC or Central Bank Digital Currency is going to be the digital form of the physical cash issued by the RBI. It will be a legal tender issued by the RBI and it will do everything that your normal physical cash does, namely act as a medium of exchange, store of value…you get the drift. 

It sounds like UPI transactions, how is it different?

Well, with UPI the mode of transaction is digital i.e instead of physically giving cash to someone, we are doing it through our phones. However, what we are exchanging is essentially the cash that we have in our bank accounts. So UPI transitions are still backed by the cash deposits we have in our bank account.

Remember the message that is displayed when you pay your friend for your share of the pizza? Xxx Bank account has been debited for Rs 350 via UPI. So yeah, the bank account still remains in the picture.

However, with CBDC banks won’t come into play. The CBDC will be stored in your smartphone’s wallet and you will be directly transferring the CBDC instead of the cash in your bank.

Wow! That sounds quite a lot like bitcoin and other cryptocurrencies

It actually is. It will use blockchain and other technologies that are commonly used in the crypto world. In fact, one of the reasons for introducing CBDC is to meet the public’s need for digital currency which is reflected in the craze for private cryptocurrencies.

However, there are some key differences, the main one being centralisation. The main USP of crypto is its decentralisation and anonymity. CBDC will turn this on its head. Only the RBI will be able to mine CBDC and each unit is expected to have a unique identification number. Hence the entire process will be centralised and there will be hardly any room for anonymity. 

Secondly, in India, cryptocurrencies are not currencies. We can’t use them as a medium of exchange. However, CBDCs will definitely become a medium of exchange. 

Why CBDC?

Finance Minister said that CBDC would provide a significant boost to the digital economy and a few of its benefits appear to be quite obvious

  • Unlike physical cash, e-rupee will have no risk of getting torn, burnt or mutilated. Its lifecycle will be endless
  • The government will significantly be able to reduce the cost of printing and circulating cash
  • Common people might find CBDC more attractive as it will not carry the risk of losses that are associated with commercial banks
  • Payments might become  instantaneous and hassle-free
  • Sending money across borders will become much easier
  • The government will be able to track transactions and hence money laundering and other kind of financial frauds can be brought under control

Open Questions

While there may be significant benefits associated with Digital rupee, there are a few open questions too

  • Right now, we are all accusomted to deposting our money in banks. For banks the more deposit they have, the better is it for them as it will enhance their lending capacity and subsequently drive more profits. Now, with the coming of digtal rupee, people might choose to keep a part of their money with banks and keep the rest of it with themselves in the form of digital currency. Now, a dwindling depostit might make it difficult for the banks to survive in the long run & that is something needs to be worked out.
  • The concept of money is a social phenomenon as well. A lot of people associate the value of money with its physical presence, the promise note mentioned on it and so on. The digital rupee will not have a tangible presence and this might lead to skepticism especially among people who are not very accquainted with technology. Hence, the acceptability of digital rupee among the masses is something we have to grapple with.
  •  Introduction of Digital Rupee will come with its fair share of technological challanges as well. Issues of speed, scalibility, audatibility and security need to be balanced and perfected before introducing digital rupee to the masses.

CBDC no doubt bring about a huge change in the entire monetary system of the country. However, there are a lot of creases that are yet to be ironed out before diving headfirst into this initiative. 

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Budget 2022: Personal Finance Changes

Budget 2022 brought a lot of questions along with it. There were reforms across various sectors and it might have gotten a little too much to absorb. We are here to discuss all the things that shall impact your personal finance. 

Surcharge Taxes on Long Term Capital Gains is going to change

Long Term Capital Gains or LTCG, are the profits that you make on selling your investment which you have held for over 12/24/36 months.

Currently, a surcharge is in place for LTCG, which essentially is a tax on tax. The surcharge for listed shares and mutual funds is capped at 15% but for the other classes, the surcharge depends on the total income.

Now, the surcharge has been capped at 15% for all Long Term Capital Assets, not just equity and mutual funds. The surcharge used to go as high as 37.5% but will now be limited to 15% which shall benefit high net worth individuals and investors who and people invested in unlisted shares and startup equity. 

 Provision to file Updated Return

Although Budget 2022 did not tinker with the personal Income Tax rates, it did provide some relief to taxpayers.

Finance Minister Nirmala Sitharaman pointed out that India is growing at an accelerated pace and consequently Indians are undertaking multiple financial transactions. Considering that, it is possible that they miscalculate their Income Tax liability.

So as an “affirmative step” towards “voluntary compliance”, Budget 2022 has introduced the provision of filing updated returns.  Under this, if any taxpayer later finds out that they have additional tax liability due to income left out after filing their ITR, then they can pay the additional tax and file an updated return till two years of the relevant Assessment Year. 

Higher Tax deduction for State Government employees for NPS

We can think of NPS as an accessible, low cost and tax-efficient retirement savings account. It is administered by the Pension Fund Regulatory and Development Authority.

As mentioned, NPS comes with tax benefits, one of which is a deduction on the employer’s contribution to NPS. A Central government employee can claim a deduction up to 14% on the employer’s contribution to the NPS account of the employee u/s 80CCD(2).

State Government employees could however only claim up to 10% deduction. Budget 2022 has now allowed State Government employees to claim a 14% deduction as well making them at par with Central Government employees. For non-government employees, the limit of deduction continues to be 10%

So which provision will be most beneficial to you? Share your thoughts with us

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Budget 2022: Taxes on Cryptocurrency, NFT & other Virtual Digital Assets

Budget 2022: Taxes on Cryptocurrency, NFT & other Virtual Digital Assets

The Budget 2022 finally brings in clarity on the taxation of Virtual Digital Assets (VDA) such as Crypto, NFT, etc.

FM Nirmala Sitharaman also announced – RBI is also going to launch its own digital currency called ‘Digital Rupee‘ by 2023.

What is a Virtual Digital Asset?

Virtual Digital Assets include Cryptocurrencies, Non-Fungible tokens i.e. NFT, or any other digital asset specified by the Central government.

What is the Tax Treatment?

All Virtual Digital Assets will be taxed as the following:

  • Income Tax as per section 115BBH applicable from 1st April 2022 onwards:
    • 30% Tax rate
    • Treatment of loss
      • Losses transfer cannot be set off against any other income
      • Losses cannot be carried forward
      • Loss under any other income head cannot be set off against VDA income
    • Gift is taxable in the hands of the reciever
    • Cannot claim expense or allowance in relation to the transfer of VDA. Expenses such as electricity, internet, depreciation, etc which are allowed for trading cannot be claimed when trading crypto.
    • Taxpayer can claim the cost of acquisition i.e purchase price from the sales consideration i.e. selling price.
      Taxable transfer of VDA = Selling Price – Purchase Price
  • TDS u/s Section 194S effective from 1st July 2022 onwards
    • TDS should be deducted at 1% on payment if transfer amount exceeds INR 50,000 (Individual/HUF payer having income from B&P) or INR 10,000 otherwise.

What will be Income Head?

There is still confusion to classify Income from transfer of crypto, NFTs, etc under the relevant Income head.

Under one school of thought, it should be reported under the ‘Income from Other Sources’ since:

  • a special section 115BBH under the Income Tax Act is introduced. This section is on lines of lottery, betting and gambling income u/s 115BB, these are taxed under the head IFOS.
  • Crypto, NFTs and other VDAs are not included in the defination of capital assets u/s 2(14).

On the other end, another school of thought suggests that it should be included under the head ‘Income from Capital Gains’ because:

  • definition of capital asset includes “any other capital asset”, which may/may not include crypto, NFTs, etc.
  • the term “transfer of assets” is usually referred in relation to capital assets
  • the term “cost of acquisition” is often used when calcualting income under the head ‘Income from Capital Gains’

Let’s hold up for the circular from the Income Tax Department for the final word.

What about different VDA activities and transactions?

Profit/Loss from the transfer is a small subset of crypto, NFT, and other digital transfers.

Other activities with Virtual Digital Assets encompass:

  • Crypto Derivatives trades eg: Bitcoin Options, Ethereum Options, Bitcoin Futures, etc. Since derivatives trading doesnot include transfer of VDA, it cannot be classfied as “trasfer of asset.
  • Other Incomes from Crypto earned such as Reward Income from Crypto staking, etc; it is usually earned from pledging of cryptos and therefore no trasnfer is involved.
  • Transfer of crypto within different wallets of the same trader; since there is no change in ownership.
  • Crypto and NFT trades/transfers are not restrcited to a specific country, therefore clarrification is awaited on the compliance requirements for TDS deduction.
  • One of the fundamentals of trading crypto does not necessarily reveal the identity of the counterparties, deducting and depositing TDS may be a challenge.

These activities cannot be explicitly classified as “Transfer of VDA”, and hence need clarification on their tax treatment.

After almost a year full of uncertainty and confusion, today’s budget addresses these concerns to an extent. However, with the universe of crypto, NFT, and yet to arrive digital assets, there is a long way to go.

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Let's Understand the Tax P&L Report from 5Paisa

You can download the Tax P&L Report from Quicko’s tax planner on the tax P&L tab. The report includes details of segment wise trading – scrip name, buy value, sell value, and trading expenses. Segments included are – Equity Shares, Mutual Funds, Equity Intraday, Futures and Options.

Income Head – Capital gain covers gain or loss from the selling of Equity Shares (except intraday transactions), Mutual Funds (MF), Restricted Stock Units (RSU), Equity Traded Funds (ETFs), and Employee Stock Option Plans (ESOPs). 

Business Income Head covers Equity Intraday transactions, Futures and Options. This Tax P&L Report can be used to prepare P&L A/C to report it in the Income Tax Return. 

However, the trader must take care of the following things where the treatment as per Income Tax may differ: 

Expenses 

The Tax P&L Report covers transfer expenses that are directly related to trading transactions 

The transfer expenses (such as brokerages, GST, transaction charges, STT, stamp duty etc.) are given separately under both Equity Shares. However, in the case of Mutual funds, the transfer expenses are included in Buy and Sell Prices 

In the case of Intraday and F&O, you can also claim other expenses – such as internet expenses, legal fees, subscription expenses, depreciation, etc., which are not covered in the Tax P&L Report.

Calculation of Long Term Capital Gains under Section 112A 

LTCG on the sale of securities (on which STT is paid), bought on or before 31st Jan 2018 should be calculated using the Grandfathering Rule. As per this rule, the Cost of Acquisition is computed after considering the FMV as of 31st Jan 2018 as per Section 112A

The FMV is taken into consideration while computing LTCG for each trade in the Tradewise Tax P&L Report. 

Calculation of Turnover 

There are two different methods to calculate turnover for Intraday and Futures & Options: 

  • Scripwise Method: You calculate the turnover by collating all trades on the particular scrip for the financial year, find the average buy/sell value, and then determine the turnover 
  • Tradewise Method: You calculate the turnover by summing up the absolute value of profit and loss of every trade done during the year 

You can learn more about scripwise and tradewise trading

1. Intraday 

Trading in the stock market on a same-day basis. Thus, it would mean buying and selling on the same day itself. 

Turnover  

For all intraday transactions, the aggregate or absolute sum of both positive and negative differences from trades is to be considered as a turnover. 

Profit/Loss 

Gross P&L is generally calculated by summing up overall sales amount reduced by buy amount. 

Net P&L = Gross P&L – Transfer expenses 

2. Futures & Options 

In the Tax P&L report, F&O turnover and P&L is computed by considering the following trade segments: 

  • Equity Futures & Options 
  • Commodity Futures & Options  
  • Currency Futures & Options 

Turnover 

For Futures transactions, Turnover = abs(sell value – buy value) 

For Options transactions, Turnover = abs(sell value – buy value) + sell value 

*abs() stands for absolute value 

Profit/Loss 

Gross P&L is generally calculated by summing up overall sales amount reduced by buy amount. 

Net P&L = Gross P&L – Transfer expenses 

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