Taxation of Capital Gains
on Shares
ü Generally, profits arising on sale of any
capital assets are treated as long-term if the same have been held for 36
months or more on the date of sale.
ü However, in case of shares in any Company, the
holding period requirement is only 12 months or more in order to make such
profits as long-term. It is important to note that the requirement of
lower holding period is applicable for shares in any Company and not
necessarily an Indian Company.
ü Moreover even shares held in a private limited
company will become long- term if held for 12 months or more on the date of
sale of such shares.
ü As per the present provisions of income-tax laws, any long-term capital
gains arising on sale of equity shares listed on Indian stock exchange and sold
through a stock-broker (On which STT have been paid) are fully exempt from
income tax under section 10(38) of Income tax Act, 1961.
ü This exemption is not available in case the listed shares are sold
outside the stock exchange platform or cases where the shares have been
tendered under buyback scheme or under any open offer.
ü It is also pertinent to note that this exemption is available only in
respect of equity shares listed on Indian Stock Exchange whether it is an
Indian Company or a foreign company. This way say shares of Standard
Chartered Bank, a foreign company, which are listed in India enjoy this
exemption.
ü In case of profit on equity shares sold on stock exchanges in India held
for less than 12 months are s taxed at a flat rate of 15 percent (Section 111A).
It is also interesting to note that even in cases where the applicable slab tax
rate is 10 percent, you will still have to pay tax of 15 percent on such short-
term capital gains.
ü This rate still will be 15 percent even in case the slab rate applicable
to you is 30 percent. In case your other income excluding this short- term
capital gains is less than basic exemption limit, you will be entitled to take
the benefit of such shortfall in the basic exemption limit while calculating
your tax liability.
ü Tax in respect of capital gains arising
on sale of shares other than equity shares transacted on Indian Exchange: - All transactions of shares do not take place on the plat form of
stock exchange. This would cover transaction of unlisted shares as well as
transactions of listed shares in the form of open offer or buy back by of these
shares by the company directly.
ü Any capital gains arising on sale of such transactions will still be
treated as long-term if the shares have been held for 12 months or more on the
date of sale. In case the shares are sold within 12 months, the short-term
capital gains arising on such transaction shall be included in your regular
income and shall be taxed at the slab rate applicable to you.
ü Generally the tax-rate applicable in case of long-term capital gains is
20% if you consider indexation. However in case the LTCG calculated with
indexation is higher than 10% of unindexed capital gains, your liability on
such long-term capital gains shall be restricted to 10 percent only in certain
cases.
ü This option of choosing between 20 percent on indexed long-term capital
gains or 10 percent of unindexed capital gains is available only in case of
listed shares which are transacted outside stock exchange. So in case you had
tendered shares of listed company under buyback scheme, your liability would be
restricted to 10 percent of profit made by you in case the shares were held for
12 months or more.
ü In case the shares sold are not listed in India, this option of choosing
between 10 percent unindexed and 20 percent indexed capital gains is not
available.
ü However in case of short-term gains, though the shares are listed in
India, your liability on such short-term gains will depend on the slab rate
applicable to you.
Taxation of Dividends received on shares:
ü Any dividend received on shares held in Indian company is fully exempt
from payment of tax (Sec. 10(34)). However the company is required to pay a tax
called Dividend Distribution Tax on such dividend
So,
ü
Long term
Gain from Shares (Through STT) – Exempt from Income Tax
ü
Long Term
Gain from Shares (Without STT) – 20% after considering Indexation OR 10% without Considering Indexation, WHICHEVER
IS BETTER FOR ASSESSEE
ü
Short Term
Gain from Shares (Through STT) – 15% Flat
ü
Short Term
Gain from Shares (Without STT) – Applicable Slab Rate
ü
Dividend on
Shares and Mutual Fund is Exempt from Income Tax
ü
Long Term
gain from sale of Equity Oriented (65% should be in Equity) Mutual fund is
Exempt
ü
Short Term
Gain from sale of Equity Oriented Mutual fund – 15%
ü
Long Term
gain from sale of MF Other than Equity Oriented (65% should be in Equity) - 20% OR 10% whichever is lower
ü
Short Term
Gain from sale of MF other than Equity Oriented – Applicable Slab Rate
Chirag
Chordia
AIR CA,
CS, B.Com
Member of
The Institute of Chartered Accountants of India
Can be
reached at +91-8080492124/chiragb.chordia@gmail.com
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