TAX IMPACT ON SECURITIES

By: Kehkesha Verma

TYPES OF SECURITIES
Equity Shares Derivatives: Futures & Options

EQUITY
Profit/ Loss Taxable under:
Capital Gains : If Capital Asset (If Investment) Business Income : If Stock in Trade (Regularly Traded)

Dividend Income: Income from Other

Sources

RECOGNITION: CAPITAL ASSET/ STOCK IN TRADE

Treatment in assessees books of accounts Quantum of sale and purchase Holding period Purpose of Investment

CAPITAL GAINS

Short Term Capital Gain (STCG)

Long Term Capital Gain (LTCG)

STCG/ LTCG
Shares (Listed/ Unlisted)

12 months or Less

More than 12 months

STCG

LTCG

STCG
Profit taxed at normal slab rates as applicable to assessee Loss allowed to be set off/ carried forward as per loss on other Short Term Capital Assets

SECURITIES TRANSACTION TAX (STT)

Levied on all sale/ purchase securities transactions entered through Recognized Stock Exchange Covers Shares, Derivatives, Equity Oriented Fund E.g., for future transactions STT rate 0.01% and for transactions settled in delivery STT rate 0.1%

STCG u/s 111A

Applicable to all assessees including nonresidents Applicable
On transfer of Equity Share or Unit of Equity Oriented Fund Transaction chargeable to STT

Taxable @ 15% Benefit of Slab Rate to Resident Individual or HUF Chapter VI- A deduction not allowed

LTCG (PROVISO TO SEC 112)

Applicable on Transfer of Listed Shares Tax Rate : Lower of
20% (after indexation) 10% (before indexation)

If shares unlisted, then tax @ 20% (after indexation) Benefit of Slab Rate to Resident Individual or HUF Chapter VI- A deduction not allowed

LTCG u/s 10(38)

Applicable to all assessees including nonresidents Applicable
On transfer of Equity Share or Unit of Equity Oriented Fund
Transaction chargeable to STT

Tax Free Mode of acquisition not important LTCL cannot be set- off or carried forward

TRANSFER BY DEPOSITORIES
Cost of Acquisition and Period of Holding determination: FIFO Securities first entered, considered sold first

POINTS TO REMEMBER
Indexation of cost for LTCG allowed on both Listed and Unlisted Shares Cost of Acquisition, more of Purchase Cost or Fair Value as on 01.04.1981 (allowed for all shares, including bonus) STT not allowed as deduction Profit/ Loss = Sale Price- Purchase Price- Brokerage paid Brokerage paid on sale and purchase allowed as deduction

BUSINESS INCOME
Recognized where regular trading in securities Profit/ Loss treated as normal business income Profit/ Loss = Sale+ Closing Stock- Opening StockPurchases- Expenses STT is allowed as deduction

DIVIDEND INCOME
Dividend is tax free in hands of receiver Company declaring dividend pays Corporate Dividend Tax Dividend received from foreign taxable to receiver at normal tax rates

DERIVATIVES
Before 2005-06, transaction in derivatives treated as Speculative Transaction for purpose of taxation Speculative Transaction: Where transaction is settled without actual delivery Speculation business loss can be set off only against another speculation business profit Contd.

 Now, transactions in derivatives through Recognized Stock Exchange not speculative Taxation:
If Business Income: As normal business income at normal slab rates applicable If Capital Gains: Always short term, as need to be squared off in 3 months. Taxed at normal rates. Benefit of Sec 111A not allowed