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  Tax Corner - Equity Shares Back
 
Is there any tax implication while making an investment in shares? Are investors in shares entitled to any tax benefits?
 
There is no tax implication while making an investment in shares. There are tax benefits to investing in some pre-approved companies as mentioned in the third point below. The tax implication arises only at the time of sale of shares as under:
 
  • If certain eligible equity shares are purchased on or after March 1, 2003 but before March 1, 2004 and are transferred after 12 months, then the gain on the sale of such shares will be entitled for exemption under Section 10(36) of the Income Tax Act, 1961 by eligible equity shares. This applies to any equity shares, which form part of the BSE 500 index of the Bombay Stock Exchange, the transaction of purchase and sale of which have been entered into through a recognized stock exchange in India and any equity shares, allotted through a public issue on or after March 1, 2003 and listed in a recognized stock exchange in India before March 1, 2004 and the transaction of such shares, if entered into through a recognized stock exchange in India.
  • After October 1, 2004, any equity share, which has been sold through a recognized stock exchange and on which Securities Transaction Tax (STT) has been paid would be entitled to exemption from long-term capital gains under Section 10 (38) of the Act. Similarly, in case of short-term capital gain of such shares, the gains shall be taxed at 15% (plus education cess) in a financial year.
  • Under Section 80C, any subscription to equity shares or debentures forming part of any eligible issue of capital, approved by the court or an application made by a public company or subscription to such eligible issue by a public finance institution in a prescribed form, would be eligible to deduction subject to the condition of this Section. Also, subscription to any unit of a mutual fund, approved by the board in respect of any mutual fund, referred to in Clause (23D) of Section 10, would also be entitled.
What is the tax implication of a bonus/rights issue on equity shares?
Under Section 55(2)(AA), bonus on equity shares has a zero (nil) cost of acquisition. The holding period is calculated from the date of allotment of equity shares. The net sales proceeds are treated as the capital gain. The period of holding of such issue is reckoned from the date of the allotment of such issue.
 
The cost of acquisition of the rights issue on equity shares is the amount actually paid for acquiring such right according to Section 55(2) (AA) (iii). The holding period is reckoned from the date of allotment.
Where there is a transfer of these rights, the cost of acquisition of such rights is to be taken as 'nil' according to Section 55(2) (AA) (ii). The sale price of such transferred rights will be taken as capital gain.
 
The period of holding in the hands of the transferor is computed from the date of offer, made by the company to the date of renouncement.
 
In case of the transfer of such rights, the cost of acquisition is the aggregate of the amount of purchase price, paid to the transferor to acquire the right entitlement and the amount, paid by him to the company for subscribing to such right offer of share.
 
The period of holding in the hands of the transferee will be from the date of allotment of such shares.
What is the tax implication on "split shares"? Is the cost of acquisition halved or is it taken as nil? What about the period of holding?
 
The split shares represent the sub-divided shares of a lot of shares. The cost of such shares gets proportionately divided and the period of holding also continues to be the same as that of the original lot.
What is the capital gains liability arising on sale of shares i.e. long-term/short-term?
 
In case of equity or preference shares in a company, if the shares are held for more than 12 months immediately prior to its transfer then it is known as long-term capital asset and on transfer of long-term capital asset, long-term capital gain may arise. Long-term capital gains arising on transfer of equity shares will not be chargeable to tax, if such transaction of sale is entered on or after April 1, 2004, and is subjected to STT (Section 10(38)).
 
If an investor has multiple demat accounts, does he calculate capital gains on the first-in-first-out (FIFO) basis on each demat account separately or just once across all demat accounts?
 
In case of multiple demat accounts, the capital gains on sale of shares has to be computed on the basis of the FIFO with reference to the particular account from where the shares are sold. The FIFO method was introduced to bypass the process of determining the cost on one to one basis with the particular Depository Participant.
Can short-term capital gains be set-off by investing in capital gains bonds?
No, Short-term capital gains cannot be set off by investing in capital gains bonds under Section 54EC. This benefit is only in respect of long-term capital gains.
For how long can capital loss (short-term or long-term) be carried forward by investors?
A capital loss (short-term/long-term) can be carried forward for a maximum period of 8 years from the assessment year in which the loss was first incurred.
 
A short-term capital loss can be set off against any capital gain (long-term and short-term). However a long-term capital loss can be set off only against a long-term capital gain.
What is the STT and how does it work? Are investments made prior to the STT regime eligible for the long-term capital gains tax waiver or is this facility available only to post - STT investments?
 
The STT has been introduced by Chapter VII of the Finance Act (No.2) Act, 2004. It provides for a levy of a transaction tax on the value of certain transactions. These transactions include the purchase and sale of equity shares in a company, purchase and sale of units of an equity growth fund, sale of a unit of an equity growth fund to the mutual fund and sale of a derivative. The transaction tax will be payable on all transactions that have taken effect from October 1, 2004.
 

 

Transaction in recognised stock exchange in India

Sale of unit of an eq. oriented fund to the mutual fund

Purchase of equity shares, units of eq. oriented mutual fund (delivery based)

Sale of equity shares units of eq. oriented mutual fund (delivery based)

 Sale of equity shares, units of eq.  oriented mutual Fund (non –delivery based)

Sale of derivative

Whether securities transaction tax (STT) is applicable

Yes

Yes

Yes

Yes

Yes

Who has to pay STT

Purchaser

Seller

Seller

Seller

Seller

Rate of STT
-from June 1, 2008


0.125%


0.125%


0.025%


Refer table below


0.25%

Tax treatment of long - term capital gain in the hands of seller

NA

Exempt from tax under section 10(38) [long - term capital loss if any shall be ignored]

Income is generally treated as business income

Income is generally treated as business income

Exempt from tax under section 10(38) [long-term capital loss if any shall be ignored]

Tax treatment of short-term capital gain in the hands of seller

NA

Taxable at the rate of 15% (+surchage +education cess) under section 111A

Income is generally treated as business income

Income is generally treated as business income

Taxable at the rate of 15% (+surchage +education cess) under section 111A

Tax treatment of business income in the hands of seller

NA

If income is shown as business income, one can claim tax rebate under section 88E

One can claim tax rebate under section 88E

One can claim tax rebate under section 88E

One can claim rebate under section 88E

Who will collect STT

Stock exchange

Stock exchange

Stock exchange

Stock exchange

Mutual fund

Education cess: Nil

Note: STT is not applicable in case of Government securities, bonds, debentures, units of mutual fund other than equity oriented mutual fund and in such cases, tax treatment of short - term and long - term capital gains shall be as per normal provisions of law.
 

Taxable Securities Transactions

Rate

Payable by

(a) Sale of an option 

0.017% on option premium

Seller

(b) Sale of an option in securities
where option is exercised 

0.125% on the settlement price

Purchaser

(c) Sale of a futures in securities 

0.017%

Seller

(d) Purchase/Sale of equity shares, units

     of equity oriented mutual fund (delivery based)

0.125%

Purchaser/Seller

(e) Sale of equity shares, units of equity oriented mutual  

      Fund (non –delivery based)

0.025%

Seller

(f) Sale of unit of an equity oriented fund to the Mutual

    Fund

0.25%

Seller

Effect of levy of the STT:
  1. Long-term capital gain, arising to an investor from the sale of these specified securities, shall be exempt from tax under Section 10(38).
  2. Correspondingly, long-term capital loss, arising from these specified securities, cannot be set-off against any other gain/income. This loss shall lapse.
  3. ll be exempt from tax under Section 10(38).
  4. Short-term capital gain, arising to an investor (including FIIs) from the sale of such securities, shall be charged at 15%, plus education cess under Section 111A.
  5. This exemption of long-term capital gain is available to all assessees, including FIIs.
  6. This exemption is available only to those assessees, who hold these specified securities as capital assets (investments) and not as stock-in-trade.
  7. Correspondingly, at the year-end, the stock cannot be valued at cost or market value; whichever is lower, as it is not stock-in-trade. No deduction in the value of investments would be permissible.
  8. STT will be applicable only with effect from October 1, 2004. For the earlier period, i. e. from April 1, 2004 to September 30, 2004, the earlier law will be operative.
  9. The exemption of long-term capital gain is available only to transactions in relation to the specified securities. Exemption will not be available to transactions, not specifically mentioned in the list above.
  10. The exemption would be available even in respect of specified securities, purchased prior to the introduction of STT but sold after the operative date.
  11. The exemption is available to all shares. The earlier exemption, under Section 10(36), was restricted to shares, listed in BSE 500, which were purchased after March 1, 2004 but before April 1, 2004 and sold, after being held for more than twelve months.
  12. The exemption is available to all specified securities, sold through a recognised stock exchange. Private deals or transactions, not routed through a recognised stock exchange, will not be covered.
  13. The purchase of the specified securities could be through any mode and need not be through a recognised stock exchange.
  14. The exemption is not available to other securities, which are not specified, e.g. preference shares, bonds, debenture, etc.
  15. The exemption is not available to transactions where STT has not been paid.
  16. STT, paid for the purchase and for the sale of the specified securities, will not be available as a deduction.
  17. Since long-term capital gain would now be exempt from tax, Section 14A would come into play. This means that no expense shall be allowed to be claimed as a deduction in respect of income, which is exempt. For example, expenses like interest, rent, salaries, wages, electricity, telephone, water, etc. and other administrative expense will not be allowed, as a deduction since the income earned is exempt.
  18. Rebate, under Section 88E, is available in respect of STT from Assessment Year 2005-06.
Is the dividend income, received from investments in shares, taxable?
Dividend, received from investment in shares, is not taxable in the hands of the recipient. The company, distributing the dividend, is required to deduct tax from the amount of dividend declared. Such tax deducted will not be entitled to TDS for the recipient.
Do investments in shares have any Wealth Tax implications?
Investments in shares do not have any Wealth Tax implications.
Do investments in shares have any Gift Tax implications?
Investments in shares do not have any Gift Tax implications. Investment in shares in the name of some other person other than the investors has Income-tax (gift) implications with effect from Financial Year 2004. These shares will now be treated as income.
 
Are investments made by NRIs/foreigners subject to the same tax implications as applicable to resident Indian?
NRIs are subject to lower rates of taxation. They have an option, either to choose the lower rate of tax on the capital gains or to choose the normal rate of tax if they want the cost to be indexed.

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