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Equity Shares Tax Corner
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 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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What is the tax implication of a bonus/rights issue on equity shares? | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
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. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
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. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
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. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
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. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
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. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
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? | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
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? | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
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)). | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
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? | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
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. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
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 gains. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
For how long can capital loss (short-term or long-term) 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.
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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? | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
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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Education cess: Nil | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
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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Effect of levy of the STT: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
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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 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 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. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Are investments made by NRIs/foreigners subject to the same tax implications as applicable to resident Indian? | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
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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