Thank you Ashish. I have the following queries
1) Now should I pay the long term capital gains tax for Rs200000 (current value) - Rs 100000 ( original amount lent to my friend) = 100000 ( profit).
Not you but your friend will have to LTCG. BTW, Sale Consideration paid by you to your friend and not the current market value will form the base for LTCG computation. So if your friends sells you those shares for say Rs. 50,000he can claim Long Term Capital Loss as well.
Further, do not link loan to LTCG. Both are different transactions.
2) Should I pay this amount in the financial year in which my friend does this off-market transaction to my account or can I pay this amount in the financial year in which I sell the shares? If I sell it in this financial year itself. Will it become short-term capital gains?
Your friend will have to pay LTCG in the year of the off-market transaction. When you sell those shares again, the same would be sold through exchange and the applicable rules will be used for computation of tax liability. Thus, it'll be STCG at if you sell those shares within the same financial year.
3) Now let us say the off-market transation happen for Rs200000 and then I sell it off when the market goes down, say for a value of Rs190000. Then should I still pay any long term Capital gains tax as I have made a loss from when the amount was transfered to my account?
As explained earlier, The two transaction are different from each other and hence will be taxed seperately.
4) Is the option of my friend selling these shares and giving me a cheque better so that I can reinvest in those shares again better?
That will be a hassle-free transaction. Rs. 1,00,000 will be treated as your interest income as it's a result of the loan given by you to your friend.
Best Regards,
--Ashish