SBI, HDFC Bank touch new highs; were your gains worth Rs 1 lakh in year in these stocks? Know if you are liable to pay taxes - check example

There is an immense joy when your pocket is filled with hefty gains from investment in stocks. A point to note is that equities so far have fetched much greater and higher returns than compared to any other investment. However, equities require constant attention and patience, as stock market changes every second depending upon political and economic factors across the globe. If we look at largest lenders like State Bank of India (SBI) and HDFC Bank, then these two have surpassed bearish shocks of Dalal Street in mid-2018, and with stable business portfolio and outlook ahead have raced to higher levels. Both SBI and HDFC Bank have clocked a new all-time high during Tuesday’s trading session. 

Those who bought these two shares even a year ago, have emerged as big-time winners. Many would be now planning to book profit from their gains in SBI and HDFC Bank shares. However, considering capital market is a money making source, the returns arising from the exchanges are called as ‘Income from other sources’ in Income Tax Act. That means, you will have to pay taxes. Sadly there is no escape, but for few investors, there is a backdoor. 

During Budget 2018, the Finance Minister Arun Jaitley brought back long term capital gains (LTCG) on sale of equity shares or units of equity-linked funds. Under the guidelines, if your stock income is realized after March 2018, then you will liable to pay tax of 10% on your gains. Notably, if your gains are up to Rs 1 lakh per year, then they are tax free, otherwise not.

Here’s how, you can understand taxes on income arriving from stocks with few examples.

SBI - The bank touched a 52-week high of Rs 347.10 per piece. With this, SBI has rocketed by a whopping 41.61% in one year’s time. A year ago same day, the SBI shares were trading near Rs 245-levels. 

Let’s suppose you invested Rs 1 lakh on May 21, 2018 in SBI at a share price of Rs 245 per piece. After 1 year, your investment portfolio has just jumped by 41.61%. This means you take home over Rs 1.41 lakh. 

Here, your gain is over Rs 41,000  - hence no taxes will be levied when you sell your equities. 

But if you invested Rs 5 lakh in SBI on May 21, 2018, then you take home over Rs 7.08 lakh on sale of equities. Your gains rounds up to Rs 2.08 lakh on your investment amount of Rs 5 lakh. This means the capital gains will be taxed at 10% rate. 

HDFC Bank - The lender touched an all-time high of Rs 2,449 per piece on Sensex. In a year’s time, the bank’s shares have now jumped by 22.94%. The stock was trading near Rs 1,991-level on May 21, 2018. 

In this case, if you have invested Rs 1 lakh on May 21, 2018, then your shares have jumped by 22.94% resulting in total Rs 1,22,940. Your overall portfolio has risen by Rs 22,940 which is tax exempted in a year. 

Meanwhile, if invested Rs 5 lakh a year ago same, then your investment rises to Rs 6,14,700. On Rs 5 lakh investment, you gain Rs 1,14,700 which are taxable. 

A stock held for over 36 months or 3 years are called as LTCG assets. There are also host of assets considered as short term are meant to be kept for 12 months period. These are - equity or preference shares of a firm, securities, units of UTI, units of equity oriented mutual fund and zero coupon bonds. So this means, if gains from these assets are sold after 1 year, they fall under LTCG category. 

The LTCG is computed by deducting the cost of acquisition from the full value of consideration on transfer of the long-term capital asset.

In case of a listed equity share or unit, the fair market value means the highest price of such share or unit quoted on a recognized stock exchange. 

If you have witnessed any losses in your equities, then long term capital loss arising from transfer made on or after 1st April, 2018 will be allowed to be set-off and carried forward in accordance with existing provisions of the Act. Therefore, it can be set-off against any other long-term capital gains and unabsorbed loss can be carried forward to subsequent eight years for set-off against long-term capital gains, as per Income Tax department. 

Hence, either be it SBI, HDFC Bank or any other shares, understand that if your gains exceed Rs 1 lakh in equities, then they are taxable. It needs to be noted that, the actual gains in capital assets are arrived after deducting taxes, brokerage charges and other expenses.