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Ensure lower taxes and increase benefits

business Updated: Jun 24, 2008 20:49 IST
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The Indian market is inundated with mergers and acquisitions. The recent buyout of Ranbaxy’s management stake is one such example. Getting a good deal from such companies is important for investors because returns depend upon the price at which they sell their shares. It is equally important that they look at ways to ensure that their tax liability is lowered during such transactions.

Tax impact
When shares in a company are sold, a calculation is made for the capital gains or losses that are incurred by the investor.

If the sale price of the share is higher than the cost price then the investor will make a capital gain. The time period for which the shares are held will determine the nature of gain or loss. If the share is held for a year or more then it becomes a long-term asset. For a holding period that is less than 12 months, the asset is counted as a short-term one. Under specific conditions the long-term capital gains is zero while the short term capital gains tax rate is 15 per cent.

Get the benefit
The benefit of a lower rate of tax will be available for investors only when certain conditions are met.

When this happens, the favourable rate kicks in and the investor benefits through a lower payout. This adds to their earnings because a larger part of the income derived from the sale remains with them. It is necessary to look carefully as to when the benefit of this will be available.

Trading on an exchange
The most important condition to fulfill is that the shares should be traded on a recognised stock exchange. In India, both the major stock exchanges the BSE and NSE have been given the status of recognised stock exchanges so the investors can trade on any platform and get the benefit of a lower rate.

When this happens there will be another factor that enters the fray. This is the payment of securities transaction tax (STT) that will be paid when the shares are either bought or sold as the investor will have to pay their share.

Investors have to be careful and ensure that their shares are routed through the stock exchange so that they are able to get this benefit where the long-term capital gains tax is at zero per cent.

There are options available for selling the shares through a off market transfer but this will lead to a higher tax rate and hence has to be watched out for.