Tax Implications of CNC Orders
If you are an investor who likes to buy growth stocks, you might be interested in knowing the tax implications of your investments. Growth stocks differ from conservative stocks in that they expand much faster than the market as a whole. You need to use the CNC order type to buy and hold these stocks for more than one day.
CNC full form in share market is Cash N Carry, which means that once you pay the total amount for the shares you buy, you carry them in your Demat account till you make your targeted profit. In this article, we will learn about the tax implications of CNC orders depending on the duration of your holding period. We will also share a few tips on tax-efficient CNC investing.
So, let the party begin.
What are growth stocks, and why are they popular among investors?
Growth stocks are shares of companies that may grow faster than the market average in revenue and earnings. These companies often operate in emerging or innovative industries, such as technology, biotechnology, e-commerce, or renewable energy.
Such companies offer products or services in high demand or have a competitive edge over their rivals. Growth stocks typically do not pay dividends; they reinvest their profits to fuel further growth.
Investors buy growth stocks to benefit from the potential capital appreciation of these stocks in the long run. Growth stocks can generate impressive returns for investors willing to take higher risks and have a longer time horizon.
Explained: The difference between short-term (STCG) and long-term capital gains (LTCG) tax
You pay Capital gains tax on the gains after the sale or transfer of a capital asset, such as land, a building, a house, growth stocks, shares, mutual funds, etc. Capital gains tax falls into two types: short-term capital gains tax (STCG) and long-term capital gains tax (LTCG), based on the time the capital asset is held before being sold.
Let us go over the main differences between STCG and LTCG in India-
| Parameter | STCG | LTCG | ||
| Holding Period | For growth stocks, other shares, and mutual funds | Less than 12 months | For growth stocks, additional shares, and mutual funds | More than 12 months |
| Regular Assets like Land, Gold, etc | Less than 36 months | Common Assets like Land, Gold, etc | More than 36 months | |
| Tax Rate | For growth stocks, other stocks, and mutual funds | 15% | For growth stocks, different stocks, and mutual funds | 10% on gains exceeding Rs. 1 lakh in a financial year
(without indexation benefit) |
| Debt Funds | As per the applicable tax slab | Debt Funds | As per the applicable tax slab | |
| Calculation | Sale price minus the cost of acquisition, improvement, and transfer | Sale price less the indexed cost of acquisition, improvement, and transfer | ||
Therefore, if you intend to add solid growth stocks to your portfolio, you must arrange your investments and transactions for tax efficiency, considering capital gains tax.
How do you calculate the tax liability on CNC orders?
If you are a stock market investor using the CNC (Cash N Carry) product type to buy and sell shares for delivery, you might wonder how to calculate your tax liability on your profits.
The tax liability on CNC orders depends on whether you sell the shares within a year or after buying them. If you sell the shares within a year, you must pay STCG (short-term capital gains tax) at 15% of your profit.
If you sell the shares after a year, you must pay long-term capital gains tax (LTCG) at 10% on the profit exceeding 1 lakh rupees in a financial year. Add health and education cess at 4% on the calculated tax liability to arrive at the total tax liability.
Say you bought 100 units of growth stocks of company ABC and company XYZY in April 2020. One unit of company ABC is worth Rs. 700/- and one of company XYZ is worth Rs. 1000/-. You sold all the units of ABC in November 2020 @ Rs. 1000/- each and all XYZ units in October 2023 @ Rs. 2500.
| Tax Liability of Growth Stocks | X | Y |
| Profit Earned | Rs. (1,00,000 – 70,000)= Rs. 30,000/- | Rs. (2,50,000 – 1,00,000) = Rs. 1,50,000/-
|
| STCG @ 15% | 15% of Rs. 30,000= Rs. 4500/- | —– |
| LTCG @10% | —— | 10% of Rs. 50,000= Rs. 5,000/- |
The Bottom Line
CNC full form in stock market is Cash N Carry and is best suited for long-term investors who want to hold the shares in their Demat account and profit from capital appreciation. Even growth stocks, which have immense potential for huge returns, produce the best returns when given enough time to grow to maturity.
To maximize their tax efficiency, you can avoid impulsive decisions, stay patient, and choose long-term investments to increase your chances of good returns and benefit from compounding.
These strategies need meticulous planning, research, and discipline and are equally effective for growing stocks or equity. Hence, you should seek a financial advisor’s guidance to be better informed about the best tax-efficient methods for CNC orders.
