Income Tax Saga

I filed Income Tax Returns.

In the last financial year, other than salary income and FD, there were only two things that I did voluntarily from a financial perspective. 

At the end of every month, I used to put the savings in the Liquid Mutual Funds and set up STP to the Equity Mutual Funds. 

Redeemed the Mutual Funds that were not performing well.

Others were kind of forced. 

Still, the process of filing returns was very tedious.

I used to invest in stocks. Whenever Arun Jaitley and Nirmala Seetharaman were changing the policies, I used to change my strategy of investments. Last year, I got fed up with the changes that they were bringing every year, and I stopped investing in the stocks altogether.

But, the investments that I made have an effect on my returns every year. 

Tax on Dividends:

Previously, dividends were tax free in the hands of the investor. The company used to pay Dividend Distribution Tax (DDT) and give dividends. Now, the company does not pay DDT, but the investor has to pay the tax on the dividend at the applicable rate based on his/her tax bracket.

Now, I have to declare all the dividends that I have received in the last financial year and pay the tax. 

I cannot just ignore the dividend and submit returns, because many companies that pay the dividend submit all the details to the Income Tax Department.

If the dividend that I declare is less than the amount they expected, then the return would be rejected. 

In my case, there were multiple companies which submitted my details to the Income Tax Department with the amount of the dividend they paid, even when the dividend is less than Rs.10 for the entire financial year. 

Sold Stocks to Escape Tax on Dividend

I stopped buying and selling stocks, but I had to act in two cases.

I had shares of Majesco and it announced a dividend of Rs.974/share. Since the dividends are taxable in the hands of the investor, and if I receive the dividend, I would be bound to pay tax of around Rs.292/share. 

If I sell the shares, then I will have to pay tax on long term capital gains (since, I bought those more than 1 year before the sale date), if the capital gain is more than Rs.1 Lakh. My total capital gain was less than Rs.1 Lakh and no tax on that sale.

I chose the best option. I sold all the shares of Majesco at around Rs.980.

If any stock or mutual fund is bought on before Jan 31st 2018, then that needs to be reported separately with all the details. 

[On Feb 1st 2018, Arun Jaitley introduced taxes on Long Term Capital Gains in Equity. To save the people who already invested in Stocks and Mutual Funds, he exempted the profits upto Jan 31st, 2018.]

I got shares of Majesco when it went public and after that every year, I was getting a couple of shares.

For all the Shares/Mutual Fund Units that were bought after Jan 31st 2018, one has to report the cost of acquisition (of all the Stocks/Mutual Fund Units), Expenditure in Transfer (Like Brokerage etc), Sold Amount. 

But for all the shares that were bought on or before Jan 31st 2018, one has to report the following details for each share/Mutual Fund separately.

ISIN Code of the Stock/Mutual Fund

Name of the Share/Mutual Fund

No. of Shares/Units

Sale Price/Unit

Total Cost of acquisition

Fair Market Value/Unit on Jan 31st 2018

Expenditure for the transfer of the Share/Mutual Fund (Like Brokerage)

Since I bought a few shares of Majesco before Jan 31st 2018 and a few shares after Jan 31st 2018, I had to split them into two, get all the details separately and fill them.

Selling Stocks in Buy Back

I sold shares of TCS as well, because they offered buy back. Typically, when buy back is offered and if the price of the buy back is more than the market price, one would be at advantage by offering in the buy back. Of course, this is not always the case. TCS was one example, where those who did not offer in a buy back were better off. 

For TCS, I bought shares over the last couple of years, but all are after Jan 31st, 2018.  

If the shares are sold within one year after buying, then one has to pay Short Term Capital Gains (15%). If they are sold after one year, then one has to pay Long Term Capital Gains (10% above Rs.1 Lakh). 

I had bought a few shares of TCS within one year. 

To file the returns, I had to split into two parts, one set with shares that were bought more than a year back, and one set that were bought within that year. 

For both the sets, I had to calculate the following.

Total Cost of Acquisition 

Sold Amount.

Expenditure in Transfer [I just put 0 for this in all the sections, as it was a small amount]

Rights Issue

Whenever a company gives rights issue, we can either exercise the issue or sell it to someone else. The exercise or sale has to happen within a limited time after receiving the issue (around 2 weeks). If we don't exercise/sell within that time frame, it would lapse. So, those who are not interested in exercising the issue, can sell it for the market price. 

When you sell that issue, the money that you get is going to be Short Term Capital Gain. And, you have to pay tax on that. 

I got a few rights issues worth less than Rs.400 (in the entire Financial Year). Since I sold them, it was a Short Term Capital Gain and I had to report and pay tax. 

Mutual Fund Units that I sold 

Few Mutual Funds were not performing that good and I sold units in those. I sold a few others of Dividend type. Since, Dividend option is prone to more tax, I redeemed as soon as they were unlocked (Tax Saving Mutual Funds are locked for three years). 

All of them were bought through SIP and spanned before and after Jan 31st 2018. Just like stocks, for Mutual Funds also, for any Mutual Fund that was bought before Jan 31st 2018, needs to be reported separately with all the details. For the units that were bought after Jan 31st 2018, we can combine with all other mutual funds/stocks and report as a single number. 

Even if we are going to report it as a single number for the stocks/mutual funds, to get the final number, we have to calculate at each stock/mutual fund and then sum up to get the final number.

Profit in Liquid Mutual Funds 

Some time back, I switched investing from SIP to STP. 

In SIP, on the specified day, money is deducted from your bank account and invested in the Mutual Fund you choose. 

In STP, on the specified day, a few units would be redeemed from the Mutual Fund you choose, and invested in another Mutual Fund.

When I was investing through SIP, I was unable to manage my bank account, as I was not sure how much money I had to keep in the bank account for all my SIPs and how much money I can use for my expenses. 

Now, I put all the surplus money in Liquid Mutual Fund (Which is a safer form of Mutual Fund and gives returns little better than the Bank account). For example, if I put Rs.12,000 in a Liquid Fund, then I can put an STP of Rs.1000/month over 12 months to another Equity Mutual Fund.

In this process, the Liquid Mutual Fund generates some profit, and I have to pay tax on that. 

Short Term Profits in Liquid Mutual Funds are taxed at the highest tax bracket, unlike Equity Mutual Funds/Stocks which are taxed at 15%.

For Liquid Mutual Funds also, I had to calculate the total cost of acquisition, sale price.

Profit at different intervals

Calculating the total profit for each of the types of investments is not enough. One has to calculate the profit that they got in different periods.

All the profits need to be split into these periods. 

April 1st to June 15th

June 16th to Sep 15th,

Sep 16th to Dec 15th,

Dec 16th to Mar 15th,

Mar 16th to Mar 31st.

Any profit or dividend that you get needs to be separated in the above five periods and needs to be reported separately.

Dividend amount that you got in each of the above periods

Long Term Capital Gains in each of the above periods

Short Term Capital Gains in Equity

Short Term Capital Gains in Non-Equity

Long Term Capital Gains is going to be a little tricky, if we have Stocks/Mutual Fund units that were bought before Jan 31st 2018. We need to calculate taxable profit and split that taxable profit in those five periods. [Calculation of taxable profit of the Stocks/MF that were bought on or before Jan 31st 2018 is different from the Stocks/MF that were bought after Jan 31st 2018.]

Need Simplification of the returns

At the end of the day, after doing all those things, neither me nor the Income Tax Department is going to achieve anything significant. 

For Fixed Deposits, one can download their Interest Certificate from their bank, take that number and directly put it in the appropriate section in returns and they are done with it. 

Unfortunately for Stocks and Mutual Funds, the Income Tax Department is not accepting that. Most of the Mutual Fund AMCs offer capital gain statements, where they give the total profit in each of the funds they invested. But, that is not enough. They need the total amount invested, Sold Amount, and the profit they got in each of the five periods. For Stocks/Mutual Funds that were bought before Jan 31st 2018, it was even more work. 

If I can put four numbers in the four columns (Dividend, Long Term Capital Gains, Short Term Capital Gains in Equity and Short Term Capital Gains in Non Equity) and pay appropriate tax, then the process would be lot simpler. Government is not going to lose anything. If they want, they can directly ask the Stock Broker, Mutual Fund AMC and get the full statements and do whatever analysis they want. 

Few people may say, I am crazy. But, I like Chidambaram far better than many other Finance Ministers that we had (Except Manmohan Singh).