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 is a actually tax benefit while 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 hence for a period of 12 months or more — 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 refers to any equity share which forms part of the BSE 500 index of the Bombay Stock Exchange and the transaction of purchase and sale entered into through a recognised stock exchange in India; any equity share allotted through a public issue on or after March 1, 2003 and listed on a recognised stock exchange in India before March 1, 2004 and the transaction of such shares if entered into through a recognised stock exchange in India.
- After October 1, 2004, equity shares which have been sold to a recognised stock exchange and on which Securities Transaction Tax has been paid would be entitled to exemption from long-term capital gains under Section 10 (38) of the Income Tax Act, 1961.
Similarly, in case of short-term capital gain of such shares the gains shall be taxed only at 10 per cent.
- Under Section 88(2), 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 conditions 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 for deduction.
What is the capital gains liability arising on sale of shares, i.e. long-term/short-term?
Up to September 30, 2004, long-term capital gain shall be taxed at 20 per cent of indexed cost and short-term capital gain shall be indexed at the normal rate of taxation.
On or after October 1, 2004, in case of shares credited through a recognised stock exchange the long-term capital gain on transactions, which have suffered STT would be nil and in case of transactions resulting in short-term capital gain, the tax would be at the rate of 10 per cent.
In case of shares, which are not transacted through a recognised stock exchange and on which STT has not been paid, the law prior to October 1, 2004 would continue to be applicable.
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 gain.
In case of a capital loss (short-term/long-term), for what duration can the same 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 (Securities Transaction Tax) and how does it work? Are investments made prior to the STT regime eligible for the long-term capital gains tax waiver as well or is this facility available only to post – STT investments?
The Securities Transaction Tax has been introduced by Chapter VII of the Finance Act (No.2) Act, 2004. This 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 1st October 2004.
Effect of levy of STT:
- 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 shall not be entitled to set-off against any other gain/income. This loss shall lapse.
- Short-term capital gain, arising to an investor (including foreign institutional investors) from the sale of such securities, shall be charged at 10 per cent.
- This exemption of long-term capital gain is available to all assesses including FIIs.
- This exemption is available only to those assessees, who hold these specified securities as capital asset (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.
- 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 that are 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.
- 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. No deduction for the STT is incurred for purchase or sale of the specified securities.
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 expenses will not be allowed, as a deduction since the income earned is exempt.
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 (tax deduction at source) 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 a person other than the investors has income tax (gift) implications with effect from the fiscal 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?
Non-Resident Indians 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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