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Is there any tax implication while making an investment in shares? Are investors
in shares entitled to any tax benefits?
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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:
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- 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.
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What is the tax implication of a bonus/rights issue on equity shares?
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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.
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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.
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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.
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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.
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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.
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The period of holding in the hands of the transferee will be from the date of allotment
of such shares.
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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?
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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.
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What is the capital gains liability arising on sale of shares i.e. long-term/short-term?
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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)).
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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?
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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.
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Can short-term capital gains be set-off by investing in capital gains bonds?
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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.
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For how long can capital loss (short-term or long-term) be carried forward by investors?
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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.
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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.
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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?
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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.
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Transaction
in recognised stock exchange in India
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Sale
of unit of an eq. oriented fund to the mutual fund
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Purchase
of equity shares, units of eq. oriented mutual fund (delivery based)
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Sale
of equity shares units of eq. oriented mutual fund (delivery based)
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Sale of equity shares,
units of eq. oriented mutual Fund (non –delivery based)
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Sale
of
derivative
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Whether
securities transaction tax (STT) is applicable
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Yes
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Yes
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Yes
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Yes
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Yes
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Who
has to pay STT
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Purchaser
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Seller
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Seller
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Seller
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Seller
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Rate of STT
-from June 1, 2008
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0.125%
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0.125%
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0.025%
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Refer table below
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0.25%
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Tax
treatment of long - term capital gain in the hands of seller
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NA
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Exempt
from tax under section 10(38) [long - term capital loss if any shall be ignored]
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Income
is generally treated as business income
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Income
is generally treated as business income
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Exempt
from tax under section 10(38) [long-term capital loss if any shall be ignored]
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Tax
treatment of short-term capital gain in the hands of seller
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NA
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Taxable
at the rate of 15% (+surchage +education cess) under section 111A
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Income
is generally treated as business income
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Income
is generally treated as business income
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Taxable
at the rate of 15% (+surchage +education cess) under section 111A
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Tax
treatment of business income in the hands of seller
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NA
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If income
is shown as business income, one can claim tax rebate under section 88E
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One
can claim tax rebate under section 88E
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One
can claim tax rebate under section 88E
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One
can claim rebate under section 88E
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Who
will collect STT
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Stock
exchange
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Stock
exchange
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Stock
exchange
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Stock
exchange
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Mutual
fund
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Education cess: Nil
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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.
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Taxable Securities
Transactions
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Rate
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Payable by
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(a) Sale of an option
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0.017% on option premium
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Seller
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(b) Sale of an option in securities
where option is exercised
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0.125% on the settlement
price
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Purchaser
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(c) Sale of a futures
in securities
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0.017%
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Seller
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(d) Purchase/Sale
of equity shares, units
of equity oriented mutual fund (delivery based)
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0.125%
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Purchaser/Seller
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(e) Sale
of equity shares, units of equity oriented mutual
Fund (non –delivery based)
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0.025%
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Seller
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(f) Sale
of unit of an equity oriented fund to the Mutual
Fund
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0.25%
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Seller
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Effect of levy of the STT:
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- Long-term capital gain, arising to an investor
from the sale of these specified securities, shall be exempt from tax under Section
10(38).
- Correspondingly, long-term capital loss, arising
from these specified securities, cannot be set-off against any other gain/income.
This loss shall lapse.
ll be exempt from tax under Section 10(38).
- 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.
- This exemption of long-term capital gain is available
to all assessees, including FIIs.
- This exemption
is available only to those assessees, who hold these specified securities as capital
assets (investments) and not as stock-in-trade.
- 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.
- 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.
- 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.
- The exemption would be available even in respect
of specified securities, purchased prior to the introduction of STT but sold after
the operative date.
- 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.
- 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.
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The purchase of the specified securities could be through any mode and need not
be through a recognised stock exchange.
- The exemption is not available to other securities, which are not specified, e.g.
preference shares, bonds, debenture, etc.
- The exemption is not available to transactions
where STT has not been paid.
- STT, paid for the purchase and for the sale of
the specified securities, will not be available as a deduction.
- 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.
- Rebate, under Section 88E, is available in respect
of STT from Assessment Year 2005-06.
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Is the dividend income, received from investments in shares, taxable?
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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.
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Do investments in shares have any Wealth Tax implications?
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Investments in shares do not have any Wealth Tax implications.
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Do investments in shares have any Gift Tax implications?
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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.
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Are investments made by NRIs/foreigners subject to the same tax implications as applicable
to resident Indian?
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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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