How to optimize post tax returns

Tax on share trading can be reduced considerably by following certain Tax saving methods –

Trading as business income: –
If you consider your trading gain as “business income” then you have to pay tax as per your Tax slab. The benefit is you can deduct your trading related expenses from the gain. Suppose you made a profit of Rs 1,00,000 from equity trading and you fall into 20% tax bracket so you need to pay 20% of 1,00,000 as tax. However, this tax outgo can be reduced by showing related expenses or by adjusting loss from share trading. Expenses on internet bill, telephone bill, newspaper/magazine purchase, computer charge, brokerage etc can be adjusted with your trading profit. For example, consider your internet+telephone bill as 24,000 (full year), Computer depreciation charge as 10,000, newspaper and magazine charge as 6,000, brokerage and related expense is 4,000. So, total trading related expense comes as (24,000+10,000+6,000+4,000) = 44,000. From the trading profit of 1,00,000 (1 Lac) you can deduct 44,000 as expenses and thus net business profit comes at only 56,000. So, instead of paying tax on 1 Lac your taxable income stands at only 56,000.

Capital gain as investment income:-
If you don’t want to classify your trading activity as “business” then you need to pay only short term capital gain tax at 15%. This can be offset against only against short-term capital loss. Long term capital loss is a dead loss it can’t be adjusted or carried forward as long term capital gain is exempt from Tax. An Investor  can save tax on its short term capital gain by realizing losses existing in the portfolio.Suppose, you have  Short term capital gain of Rs 10,000. This means you have to pay 15% of 10000 i.e, Rs 1500 as tax. At the same time you have stocks (purchased within 1 year) in your portfolio those are showing loss of Rs. 5,000. You are confident that over long run those stock will turn profitable. However to lower tax outgo you can sell and repurchase the same stock at the same rate after 2 days (As delivery takes T+2 days). So, your net profit stands at (10,000 – 5,000) = 5,000. Thus you have to pay tax of just Rs 750 (15% of 5,000) instead of Rs 1,500. In this process, you can continue holding the stock having good long-term prospects and also save tax.
Thus investors should clearly understand various tax on share trading to reap maximum benefits from the investment. As by varying your holding period,  classifying  income as “capital gain” or  “business income” and by taking advantages of tax optimization measures  you can reduce your tax liabilities considerably.

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