The Hindu Business Line : Tax advantage for recent buyers of Reliance shares — Stiff tax liability for short-term sale of RIL stock

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Tax advantage for recent buyers of Reliance shares — Stiff tax liability for short-term sale of RIL stock

Suresh Krishnamurthy

THE shareholders of Reliance Industries, who bought the stock before the record date, may be able to book a capital loss on sale of their investments, if the company's public notice in newspapers on Monday is anything to go by. Capital loss results when the selling price of a share is lower than the purchase price.

The notice sets out the ratio for apportioning the cost of RIL shares acquired before the demerger for computing capital gains tax liability. As per the ratio, those who acquired the RIL stock at any price above Rs 650 may be in a position to book tax losses. Higher the acquisition price, higher will be the capital loss.However, those selling the RIL stock after the record date would attract stiff capital gains tax, if their holding period is less than a year. Capital gains tax may work out to as much as 5 per cent of the total investment wiping out any benefit from tax losses. This is especially significant for buyers of Reliance stock in early 2005 when the stock price was ruling below Rs 600.

For purchases made just before the ex-benefit date of January 18, capital losses may arise on a sale of holdings in Reliance Energy Ventures and Reliance Communication Ventures - two of the four companies that will come into existence after the demerger. Since capital losses can be set off against capital gains, it could lead to savings in taxes. Savings will work out to about 2 per cent of the prevailing market price of Reliance Industries.

The extent of capital losses would, however, depend on the listing price of Reliance Infocomm. If Reliance Infocomm lists with a market capitalisation of Rs 30,000 crore, possible capital losses would be significant. If Reliance Infocomm, however, lists with a market capitalisation of about Rs 42,000 crore there will be very little capital loss.

For long-term holders in the stock of Reliance Industries, the apportioning ratio does not have any consequence. They will be sitting on tax-free capital gains on the Reliance Industries stock and on the stocks of four resulting entities.

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