Income tax on shares and securities in India
Income tax on shares: Generally, Transaction involving the transfer of Capital Assets will attract Capital Gains if any profit or loss is realized by an assessee. Such Income or Loss is chargeable under the head of Capital Gains for investors in the previous year in which transactions took place.
Shares and Securities are treated as Capital Assets if trading of such assets is not a mainline business.
Shares : Shares are issued by the company to raise the Capital Employed. Both listed and unlisted companies issue shares. It is of two types, Equity Share and Preference Share.
Securities : The company issues various types of other types of instruments to raise Capital Employed in the company. Securities cover Debentures, Deposits, Bonds, etc.
Period of Holding (POH) : Period of Holding is important as it determines whether the Capital Gain is Long Term (LTCG) or Short Term (STCG).
|Listed Shares||POH less than 12 months||POH more than 12 months|
|Unlisted Shares||POH less than 24 months||POH more than 24 months|
|Listed securities other than shares||POH less than 12 months||POH more than 12 months|
|Unlisted Securities other than shares||POH less than 36 months||POH more than 36 months|
For the topic of Capital Gains regarding Shares and Securities, the Income Tax Act,1961 states different provisions for different Class of Shares and Securities.
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Class I : Listed Shares
Class II :
- Unlisted Shares
- Listed Securities other than shares
- Unlisted Securities other than shares
|Class I||u/s 111A. @15%||u/s 112A @10% on amount exceeding one lakh rupees|
|Class II||Normal Sections of Short Term. Normal Tax rates.||u/s 112 @20%|
In this article, we will cover Class I as Class II is treated the same as other capital assets. You can read the Class II taxation provisions at Income Tax Rules on Capital Gains
Previously, before 2018, any type of long-term capital gain from the listed equity share used to be TAX-FREE. But in the year 2018, Late Finance Minister Arun Jaitley introduced Section 112A to tax such transactions vide budget 2018.
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Income tax on shares under Section 111A
Short Term Gains arising from trading of listed equity share are taxable @15%. An assessee must pay Security Transaction Tax (STT) on the sale of such share. It is Special Income, no deductions allowed, but Deficiency and Rebate u/s87A is allowed.
Calculation of Income tax
The only tax rate is different butthe method to calculates Short term capital gain doesn’t change.
|Full Value of Consideration (FVC)||XXXX|
|Less: Expenses incurred||(XXXX)|
|Net Value of Consideration||XXXX|
|Less: Cost of Acquisition||(XXXX)|
|Less: Cost of Improvement||(XXXX)|
|Gross Short-term Capital Gains||XXXX|
|Less: Exemption u/s 54B/54D||(XXXX)|
|Taxable Short -Term Capital Gains||XXXX|
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Taxation on shares under Section 112A
Long Term Gains arising from trading of listed equity share are exempt up to Rs. 1,00,000 and the amount exceeding Rs. 1,00,000 is taxable @10%.
Example- Taxable amount u/s 112A is Rs. 4,50,000 so only Rs. 3,50,000 is taxed @10%
An assessee must pay Security Transaction Tax on the sale of such share. It is Special Income, no deductions allowed, Deficiencyis allowed, but Rebate u/s87A is not Allowed.
Calculation of Tax
|Full Value Consideration||XXXX|
|Less: Selling Expenses||(XXXX)|
|Less: Cost of Acquisition of listed Shares (INDEXATION IS NOT ALLOWED) (Special Rule if acquired before 1st Feb 2018) *||(XXXX)|
|LTCG u/s 112A||XXXX|
*Special Rules for listed equity share if acquired before 1st Feb 2018
Cost of acquisition will be higher of the two amounts-
- Actual Cost of Acquisition
- LOWER of
- Full Value Consideration
- Fair Market Value on 31st Jan 2018.
Lets understand this with example
|Cases||Actual Cost of Acquisition||Full Value Consideration (A)||FMV on 31st Jan 2018||Cost of acquisition (B)||Taxable Amount (A)-(B)|
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The author of the above article is Aditya Kishore.
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