A client holds Rs 10 crore of one stock with a Rs 6 crore gain, and selling costs tax at an illustrative 12.5%. How far must the stock fall before selling and paying the tax would have beaten holding, and what does the chance of that fall imply?

A fall of just 7.5% erases the tax saving: selling today leaves Rs 9.25 crore after Rs 75 lakh of tax. On an illustrative 35% volatility, a single stock falls more than 7.5% in a year roughly 36% of the time and more than 30% about 13% of the time. The tax is a known, small cost against a large, likely risk on 70% of her wealth, so the case for reducing the position in stages is strong.

People treat a tax bill as a loss and a price fall as a paper movement, but both reduce what you own by the same rupees. The tax is 12.5% of the Rs 6 crore gain, Rs 75 lakh, which is only 7.5% of the Rs 10 crore holding. Selling today leaves Rs 9.25 crore to diversify. Holding keeps Rs 10 crore of one stock, and a fall of 7.5% takes it to Rs 9.25 crore, the same place, with the risk still on.

Use a simple model and say it is one. For a single stock with an assumed 35% volatility and 11% expected return, the chance of ending a year more than 7.5% down is about 36%, more than one year in three. The chance of a fall worse than 30% is about 13%, and worse than 50% about 1.8%. A 30% fall on Rs 10 crore is Rs 3 crore, four times the tax she is avoiding. Diversified portfolios fall too, but their volatilityHow widely returns swing around their average, measured as a standard deviation; a single stock is typically far more volatile than a broad portfolio. is typically less than half a single stock's.

Mostly it only postpones it. If she will ever sell, the tax on the gain is paid anyway, so holding saves only the time value of the Rs 75 lakh, not the Rs 75 lakh itself. The tax disappears only if she never sells, and even then the shares pass to her heirs with her original cost attached under the usual framework, so they inherit the bill. Framed that way, the question is not whether to pay the tax but whether to keep 70% of her wealth in one stock while she decides when.

Close with a plan she can accept. Sell in stages, for example half now, costing about Rs 37.5 lakh of tax, and the rest over the next one to two years, perhaps protected meanwhile with a collar. Staging respects her attachment and spreads the timing risk of selling. The limit: the model's 35% and 11% are assumptions, and nobody can say this stock will fall; the case rests on the size of the risk, not a forecast.