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Friday, Mar 26, 2004

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Investors sell small, mid-cap stocks to reduce I-T burden

Virendra Verma

Mumbai , March 25

WITH the current fiscal nearing its end, several market players have started selling their shares even at a loss to minimise their income-tax liabilities.

The selling is visible more in small and mid-cap stocks and this is said to be the main reason for sharp dip in their prices in the last couple of months, say brokers and analysts.

Some of the stocks that have seen sharp dip over the last couple of months include — Neyveli Lignite, Saw Pipes, Sesa Goa, Alok Industries, KEC International, Jain Irrigation and Omax Auto.

According to brokers, several high networth individuals and investors with high income-tax liabilities are using this route to minimise their income tax liabilities.

Their strategy is simple: The mid-cap and small cap stocks bought at their peak levels earlier this year have now lost their value. Instead of holding them, market players are selling them at a loss.

By doing this, the loss on this investment is adjusted with the profit earned by them in other investments.

For instance, an investor who had bought shares at Rs 100 and sells at Rs 70, his loss is Rs 30.

This loss is adjusted with his profit of Rs 50 (on entire portfolio) for the entire fiscal, so that the income-tax has to be levied on Rs 20 rather than on Rs 50 if the investor had not sold his shares at loss.

While some investors who don't want to exit from these shares (considering good value in long term) are selling them to their relatives or family members through the market.

Brokers said these kinds of deals are more prominent this time as the stock prices of several mid-cap and small cap stocks gained sharply in the first nine months of current fiscal and several investors made huge profits in these stocks.

In many cases, the price gained 4-5 times resulting in higher capital gains tax.

Investors have to pay short-term capital gains tax at 30 per cent.

Brokers said this kind of selling (to book losses) might continue for few more days and these investors will come back to buy the same shares at lower levels next month.

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