How to reduce tax when selling shares

Investors looking for high returns and willing to take high risk, use equity/stock markets as an investment avenue. As an investor, do you know what the tax implications of gains/losses from this investment are? Are you aware of the impact corporate actions (rights issue, bonus, split, dividend) have on you from a tax perspective? If not, it is essential you understand the same so that you're able to minimise tax incidence and increase return on investment.
Securities traded on the stock exchange are treated as a capital asset. Hence transacting in securities will lead to a capital gain or a capital loss. Anil purchased 200 shares of Axis bank at Rs. 740 on 10th May 2009, and sold it off at Rs. 820 on 15th March 2010. There was a gain of Rs. 80 per share, which is termed as 'capital gain'. Capital Gain/loss can be either short-term or long-term depending on the tenure for which the security is held.
Short-term Capital Gain/Loss
If securities are sold on the exchange within a period of one year of purchase, it is short-term in nature. Short-term capital gains are taxed at 15%. Short-term capital loss can be set off against short-term capital gain & long-term capital gains.
Long-term Capital Gain/Loss
Securities held for tenure greater than a year, are termed as long-term. Long-term capital gains are tax free. Long-term capital loss can be set off only against Long-term capital gain.
In Anil's case, since Axis bank is held for a period less than one year, his gain will taxed @ 15%. So his capital gain tax would be 15% of 200*(820-740) which is Rs.2400. So his income would be reduced to Rs. 13,600. However, if  Anil had sold off his shares anytime after 10th May 2010, his gain would be Rs. 16,000.
If Long-term and short-term capital losses cannot be set off against the capital gain of that particular year then it can be carried forward for the next 8 consecutive years. Losses under the head "Capital Gains" cannot be set off against income under other heads of income whether salary, Business & profession, House Property, Income from other source.
Impact of corporate actions on taxable income
Dividend on shares: It is not taxable in the hands of the recipient, as the company declaring the dividend has already paid dividend distribution tax.
Bonus shares: These are free shares given to the shareholders depending on current holding of the share holder. If a bonus of 1:3 is announced, it means a shareholder will be given 1 share for every three shares held. For tax purposes, the ex bonus (at which the price is adjusted for corporate action on the stock exchange) date fixed by the company is considered to be the date of acquisition of the shares and the cost of acquisition is zero. So depending on when it is sold, it will be treated as short term or long term.
Rights issue: When additional shares are offered to existing shareholders at a price, it is termed a rights issue. The price at which the rights issue is done is treated as the cost of acquisition which is normally at a discount to the market price. The date of allotment of right shares is treated as the date of purchase at the rights issue price. Accordingly it will attract tax depending on the tenure for which it is held.
Stock splits: This refers to reduction in the denomination of the shares by reducing the face value of the share. That will result in a corresponding change in the market value. The date of buying the original shares is treated as the date of acquisition and the gains are taxed in the same proportion as the split.  Suppose Anil has 100 share of XYZ Company at a face value of Rs. 10 purchased on 10th January, 2009 at a price of Rs. 500. On 10th March, 2010, the company reduced the face value of the share to Rs. 5. On 30th March, Anil sold off the shares at Rs. 305.
The impact is as follows:
Change in number of shares held: On account of the split, Anil will have 200 shares of XYZ Company and his purchase prices will now be Rs. 250 per share
Tax liability on gains: Although the split has been done on the 10th of March, 2010, the date of acquisition for Anil will continue to be 10th January, 2009. Since the period of holding is greater than one year, it is categorised as long term capital gain. So his gain of Rs.11, 000 (Rs. 305-250), is tax free.
Tax Tips
Make sure you look at the holding period before sale of the security. You may want to wait for a few more days, to move from short term to long term tax treatment, if you're making profit on a transaction, so that you enjoy tax free earnings.
As long term capital loss cannot be set off against short term capital gain, you will be able to minimize your tax liability if you sell a security making huge losses for you within a period of one year.
In order to reduce your tax liability you may have sold stock before the month of March. You need to take note of the same, so that you could take position of the same stock after 1st April. This way you could save taxes, and also hold shares of the entity you sold, to book losses and hence offset gains. While calculating net gains, make sure you take the transaction cost of buying and selling into consideration.