So, supposing I have 1000 shares of SBI with an average price of 400 rupees which I am holding for more than a year now. My plan is to save income tax by doing this:
Sell all 1000 shares at a 500INR price.
Book profit of 1000*(500-400) = 1L rupees.
Buy 1000 shares again at the price of 500 rupees.
Since LTCG is 0 up to 1L rupees. I can enjoy this 1L profit tax-free and do not lose on my shares as well.
The issue is, If I do this on the same day it will be treated as an intraday transaction and I won’t gain anything out of it. Is there a workaround for this? I do not want to risk buying back the next day because of price fluctuation.
How is this profit booking if you are just going to buy back at same price? I think you might be losing in this trade by paying transaction and tax charges.
How is this Tax Harvesting… the way I understand Tax Harvesting is as follows
Tax-loss harvesting is used to reduce tax liability on investments** . 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 amount of tax
In your case you are selling it at a profit of 1 lack
Sorry for choosing the wrong words here. I did not mean tax harvesting in that sense. I mean saving income tax on 1L profit by doing these sets of transactions.
Yes. You can do this.
If you have 2 demat accounts, buy and sell at the same time. You will have to bear transactions costs. Overall its still beneficial.
Okay, that makes sense. In that case the solution by @Jason_Castelino seems best. Only other way is to buy futures or itm call option (preferably at expiry for least premium) and take delivery, but it will again include higher tax and brokerages than normal + extra premium paid.
Wow, surprised that I did not think of it this way!! I was confusing myself too much by thinking a lot I guess.
Thanks for your suggestion, I’ll do this now.
@Navneet_Singh I’ll go with @Jason_Castelino 's idea for now.
But yes, if someone really wants to do all of it from the same account then your method would work as well.
I think u can buy on different day after selling and u will be good to go.
Dont worry about price Fluctuation as it will go down or up buy 1-2% max.
Ur buying average will be around 500. and it will become a new trade.
=no Short term Gain tax.
but u have to be active and sell at every 100 rupee with 1000 shares.
or u can set sell by gtt order at 600, 700…
good trick
I am totally confused. Could someone please, if possible, explain to me this strategy.
Case Facts
I own 1000 shares of SBI at an average cost of 400. My investment is 4 Lacks.
Market price of SBI is today (say) is 500. My notional profit is 1 lack and Investment is 5 Lacks.
I sell 1000 shares of sbi. I get in total 5 lacks in my bank account as against my initial investment of 4 lacks.
Now, I go back and buy the same shares of SBI 1000 shares at 500 - My investment will now be 5 Lacks.
My Query.
If I had sold the entire shares at the market price 500, I book a tidy profit of 1 lack and since it is below the threshold level of 1 lack, (assuming there is no other investment)I keep the entire 1 lack as profit and not pay any tax - This is very clear.
But in the above scenario, I am reinvesting the entire amount of 5 lack including my profit of 1 lack into SBI shares at 500 per share. My investment is 5 lacks with the assumption that it will go to 600.
Since the entire amount I got from selling SBI at 500 is reinvested in the same SBI, what is left for me? What is my benefit? Is it not that I started with 1000 shares of SBI and after doing this transaction, I am still holding the same shares of sbi at an average cost of 500. Where is my benefit? Where is my profit which I can use?
Second Case Fact
I own 1,000 shares of SBI at an average cost of 400. The market price of sbi is 500. My investment is 5 lacks.
I sell 200 share of sbi at 500 = 1 lack which is below the tax treshold. I still have 800 shares of SBI and cash of 1 lack. My revised average cost of SBI will fall from 400 to 375.
Second year, it is assumed that the market price will go from 500 to 600. Now I hold 800 shares at an average cost of 375 per share. My investment is worth 4.8 lack (My investment cost will be 3 lacks)
I will sell 150 shares of SBI at 600 = 90,000. (This is below the treshold of 1 lack and tax free). I will still retain 650 shares of SBI. My revised average cost will be 323 per share.
I will then use this money for personal use
By doing partial selling of shares, I am getting profits to party/spend or reinvest without paying tax
In the first case, I do not have anything at all except that I achieved something notional which is tax saving without having any cash with me. Also keep in mind that although brokerage is nil with zerodha, there could be other charges like stt etc for the buy and sell leg of the transaction.
My brains are going in a tussle - Absolutely confused - Is there any sense in what I have written.
@neha1101 both cases you have listed are valid but are for different use cases.
Case 1 is for long term investor:
Say I want hold SBI for 5 years (or maybe more) because I really believe in business and think it will be around Rs. 1000 by end of 5 years.
I have bought at Rs. 400.
Now I can forget it for 5 years, do nothing. Hopefully at end of 5 years it will reach 1000, when I will sell make a profit 6 lakh. Pay tax of 0.5 lakh (of 6 lakh, a lakh tax free, remaining 5 lakh at 10%) and be happy with 5.5 lakh net gain.
Other option I have is do buy and sell every year to ensure profit of one lakh is booked every year, which is tax free.
In this option, in 5th year when my final target of 1000 is reached and I sell actual tax payable will be very less (since every year my cost kept on increasing)
And my actual profit would be close to 6 lakh
So by doing this exercise I save tax when I finally decide to sell SBI.
Case 2: Is also valid case but remember that you are selling off some SBI every year and that is done. So when price reaches 1000 rs, you will have very few shares left, and also total profit over 5 years will be much less than in Case 1. This is actually profit booking
So tax planning should be after thought and not cause of investment decision.
If you decide you love a share and really want to hold for long, do case 1, and book tax profit of 1 lakh whenever you get option, so that final tax incidence is less.
If you decide, I will get out of share as and when opportunity arises (profit booking) then do case 2, where you book profit every year in such a way that your profit every year is less than lakh and hence tax is saves.
@Akash_Shah Thank you very much for a detailed explanation. I realised my mistake. When I reinvest, the actual average will still be 400 and not 500 as profit is included.
Very crisp and clear explanation - Thank you.
I always believed in the above statement, tax, price movements, stt etc were always ancillary as the primary objective was to invest in good business and keep it for long.
Most of the businesses I have invested in are intended for the long term (God Willing), will try to use this method where possible in the next financial year when the slate is clean.
@arpitagarwal294 - Thank you for the post learnt something new today
The purpose of this very exercise of selling and buying back again is to actually book the profit and take advantage of this tax free LTCG limit of 1 lakh. If u don’t take advantage of this tax free limit, you are losing an opportunity to save tax of 10000per year. I realised it very late last year and executed some trades in fact at the end of march- couldn’t take full advantage!
