Mar 16, 2012, 09.31 AM | Source: Moneycontrol.com

Find out: How to handle demat shares for tax calculations

The issue of taxation of gains from equity shares provides the benefit of a lower tax liability for the investor. Long term capital gains for shares traded on a stock exchange have a zero rate of taxation while the short term capital gains tax is 15%.

Arnav Pandya, Expert, Expert
Arnav Pandya

The issue of taxation of gains from equity shares provides the benefit of a lower tax liability for the investor. Long term capital gains for shares traded on a stock exchange have a zero rate of taxation while the short term capital gains tax is 15%.

What is important in the entire effort is the actual procedure that is adopted for determining the holding period for shares in a demat account. The actual calculation could well change the entire picture and lead to a different position on the tax front than what was actually expected. Here is a look at how this aspect works.

FIFO method

The main point in the entire aspect of taxation as far as the investor is concerned is that the holding period is calculated on a specific basis and this method will guide how things are actually concluded. So the process that is adopted here is known as the First In First Out (FIFO) method and this is applicable for the demat shares that are held by the investor.  When the  shares are held in demat form  there is  no way to distinguish one from the other as these are just  merely numbers unlike the position in the physical form  where they have different distinguishing certificates and distinctive numbers. Hence it is assumed that the first shares that come in are the ones that are sold first and then they follow this similar format.

Easier to handle

Once this overall format is known then the entire process becomes easier to handle. Take for example a case where a person has bought 200 shares of Reliance in January 2011 at a rate of Rs 850 and then another 200 in February 2011 at the rate of Rs 790. If he sells 100 of these shares in December 2011 at a rate of Rs 810 then even though he might want to say that there is a small gain on these shares because these have been sold from the second lot that has been bought recently this argument will not hold when it comes to the calculation of the tax.  This will happen because under the FIFO method that has to be adopted the shares will be considered to have been sold from the first lot and hence there will be a capital loss that is suffered here. This could lead to a position where the entire planning could have to be reworked.

Part demat

Since this is the position that has been clearly outlined the impact of this can also be severe and might even be different from the position on the ground. Consider a situation where the individual has bought 200 shares in the demat form a couple of years ago of HUL. Now the investor might have 200 additional shares that they had bought in the physical form 8 years ago and which are still lying in the form of physical certificates.  He might decide to get these shares dematerisalised and when this is done this will be the second lot in the demat account.

Anytime that the shares are sold it will be considered that these are from the first lot that came into the demat account not from the lot that was in the physical form that was bought earlier and then converted to demat form. There are two areas where this can have an impact.

The first is the price that will be allocated as the cost price and the second is the time period for the holding of the investment. This in turn can impact the tax that might have to be paid on the investment. The sequence in which they came to the demat account is important and hence this is the way in which they will be considered for the tax purpose even though the real situation might have been different.

The author can be reached at arnavpandya@hotmail.com

READ MORE ON  tax, First In First Out

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