I am a regular reader and I have a very peculiar problem. I took VRS from a PSU Bank in 2001. While working in the bank I had invested in some blue chip shares in the 1980s. I still hold them and am sitting on lots of paper profits. From my VRS I got Rs 14 lakh. I invested Rs 8 lakh in RBI Bonds and rest in shares. I did not take up any other job but buy and sell shares for myself from my house on the internet. I have the following questions: 1. After the introduction of securities transaction tax (STT), I have made huge long-term capital gains (LTCG) from the Rs 6 lakh invested in shares. Will these be tax free or taken as my business income? I have also made some short-term capital gains (STCG). How will these be treated? 2. Will there be two sets of calculations for FY 2004-05? One pre Oct 04 and one post Oct 04 (i.e. after the introduction of STT)? 3. If I sell shares, which I am holding since 1980s, what will be the tax implication of LTCG? Will it be tax free or taxable? 4. Since I buy and sell shares for myself, will my gains fall under business or not?Anil K Jain 1. The LTCG made by you after 1st October 2004 when STT was introduced, will be exempt under section 10(38) in your hands. However, STCG after 1st October 2004 will attract tax at the rate of 10 per cent under section 111A instead of the earlier normal rate of tax applicable to other incomes. Needless to state, exemption for LTCG and 10 per cent tax to STCG is possible only if STT has been duly paid by you on your sale transactions. What is relevant is the time of your capital gain and not the time of your purchase. 2. Yes, there will be two calculations for one single financial year namely April 1, 2004 to September 30, 2004 and from October 1, 2004 to March 31, 2005 and the gains for two periods will be dealt with as per the law applicable in two periods. 3. The shares held by you since 1980, if sold now and result in LTCG, the same will be tax free subject to conditions indicated above. 4. The possibility of the Income Tax Department treating your STCG as business income is very strong in as much as the excessive volume of transactions will be held against you in claiming that you are an investor and not a trader. A trader makes business gains while investor makes capital gains. Thus the best advice you can receive is to avoid STCG altogether now so that your claim for total exemption for LTCG is not denied by the income tax department. I had purchased a flat in March 2004 for about Rs 22 lakh. This was partly financed with a loan from my employer for 15 years at the rate of 5.5 per cent per annum, a loan of 7 lakh from a PSU bank with a floating rate of interest that is currently 7.75 per cent and the balance amount from my savings. I am in an income bracket of Rs 5 lakh and above. My PPF account is to mature in April 2005, yielding about Rs 4 lakh. Please advice whether I shall give this amount as part pre-payment to my bank, and reduce the tenure of my loan?A K MATHUR Yes, I agree that your PPF proceeds amounting to Rs 4 lakh, given the other details you have disclosed, should be utilised to pay off the PSU bank loan since, as rightly feared by you, the rate of interest is likely to go up in future. It is a good idea to continue the cheaper loan at 5.5 per cent interest per annum from your emplower. Send in your insurance, tax, investment and financial planning questions to ymm@expressindia.com and get advice from our panel of experts
