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CHAPTER 3
MODULE 8
RETIREMENT
CHAPTER 5
RETIREMENT PRODUCTS
CHAPTER 6
MISCELLANEOUS ASPECTS OF RETIREMENT PLANNING
MODULE 9
TAXATION
CHAPTER 7
CONCEPTS IN TAXATION
CHAPTER 8
CAPITAL GAINS
CHAPTER 9
INCOME FROM
CHAPTER 10
DEBT PRODUCTS
10.6 Benefits not allowed from capital gain arising from Market Linked Debentures (MLDs) or the 2 types of Specified Mutual Funds (SMFs) (mentioned in 4.3.4 and 4.3.5) under Section 50AA
of
of
CHAPTER 11
TAXATION OF EQUITY PRODUCTS
CHAPTER 12
TAXATION OF OTHER PRODUCTS
CHAPTER 13
MODULE 10
ESTATE PLANNING
CHAPTER 14
BASICS OF
CHAPTER 15 TOOLS
PLANNING
MODULE 11
BEHAVIOURAL FINANCE
CHAPTER 16
BASICS OF BEHAVIOURAL FINANCE
CHAPTER 17
BEHAVIOURAL FINANCE IN PRACTICE
CHAPTER 18
RISK PROFILING FOR INVESTORS
CHAPTER 19
COMPARISON OF PRODUCTS ACROSS CATEGORIES
CHAPTER 20
STUDIES
TAXATION OF EQUITY PRODUCTS
LEARNING OBJECTIVES:
After studying this chapter, you should know about:
Tax treatment for Listed and Unlisted Equity Shares
Taxation of Preference Shares/Share Warrants
Taxation of Equity Oriented Mutual Funds
Tax treatment for Derivatives
Bonus Stripping
The equity market, often called a stock market or share market, is a place where shares of companies or entities are traded. The market allows sellers and buyers to deal with equity shares and other securities on the same platform. Equity share represents the ownership of a person in the company. Equity investments are generally considered as risky as compared to debt instruments. There are many types of equity-related products available in the market, but they are not the same. Tax rules applicable to these products also differ. Taxes can reduce the overall returns that an investor gets from a product. Thus, it is important to understand the taxability of equity products before making an investment therein.
11.1 Sources of Income
An equity investment generally refers to the buying and holding of shares by an investor in anticipation of the return of income. Two types of income are earned from investment in the equity products - Capital gains and Dividend Income. Capital Gains arise when a capital asset is sold at a price higher than its cost of acquisition.
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The dividend is the sum paid by the company out of its profits to shareholders which, in turn, reduce the retained profits of the company.
Taxability of both types of incomes has been discussed in detail in the forthcoming paragraphs of this chapter.
11.1.1 Dividend Income
Dividend usually refers to the distribution of profits by a company to its shareholders. The dividend is paid by a company out of its profits. Thus, a share of profit received by a shareholder out of the profits of the company, proportionate to his shareholding, is termed as ‘Dividend’.
Dividend declared at an annual general meeting is deemed to be the income of the previous year of the shareholder in which it is declared. The date of receipt by the assessee is not material. The interim dividend is deemed to be the income of the previous year in which the amount of such dividend is unconditionally made available by the company to the shareholder. In other words, it is chargeable to tax on receipt basis.
The tax treatment of the dividend in the hands of shareholders depends on whether the dividend is received from a foreign company or a domestic company.
Tax on dividend
After the abolition of dividend distribution tax by the Finance Act, 2020 with effect from Financial Year 2020-21, if a company, mutual fund, business trust or any other fund distributes dividend to its shareholders or unit-holders then such dividend income is taxable in the hands of such shareholder or unit-holders. The taxability of dividend and tax rate thereon shall depend upon the residential status of the shareholders and quantum of income. In case of a non-resident shareholder, the provisions of Double Taxation Avoidance Agreements (DTAAs) and Multilateral Instrument (MLI) shall also come into play.
11.1.2 Capital Gains
Any profit or gain arising from the sale of a ‘capital asset’ is chargeable to tax as a capital gain.
CH. 11 : TAXATION OF EQUITY PRODUCTS
Income from Capital Gains is computed as under:
Particulars Amount
Full Value of Consideration xxx
Less:
(a) Expenses incurred wholly and exclusively in connection with transfer (xxx)
(b) Cost of Acquisition (xxx)
(c) Cost of Improvement (xxx)
Less:
Exemption under Sections 54 to 54GB to the extent of the net result of above calculation (xxx)
Short-term or Long-term Capital Gains
Xxx
The capital gains from the sale of equity shares can be either long-term capital gains or short-term capital gains depending upon the period of holding of capital assets. This distinction is important as the incidence of tax is higher on short-term capital gains as compared to the long-term capital gains. Generally, the period of holding of a capital asset is calculated from the date of its purchase or acquisition till the date of its transfer.
Rate of tax on capital gains differs according to the nature of capital gain. Longterm capital gains are taxable at concessional rates of 12.50%. Short-term capital gains are generally added to total taxable income and are chargeable to tax as per tax rate applicable according to the status of the assessee. However, in a few cases, short-term capital gains are also taxable at concessional rate of 20%
In this chapter, we will discuss the tax treatment of capital gains arising from the following equity products:
i. Listed Equity Shares
ii. Unlisted Equity Shares
iii. Preference shares
iv. Share warrants
v. Equity Oriented Mutual Funds
vi. Equity Derivatives
11.2 Listed Equity Shares
Equity shares represent ownership of a person in a company. Any company offering its shares to the public for subscription is required to be listed on the stock exchange and has to comply with the conditions as provided in the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (commonly known as SEBI (ICDR), Regulations).
Listing of securities with stock exchange is a matter of great importance for companies and investors because this provides the liquidity to the securities in the market. The two major stock exchanges of India in which shares of a company can be listed are Bombay Stock Exchange (BSE) and National Stock Exchange (NSE).
11.2.1 Charges & Taxes
Various taxes and charges are payable to purchase and sell equity shares through stock exchanges, which have been explained below.
Brokerage
Brokerage is charged by the share broker who maintains the share trading account of the investor. The amount of brokerage depends upon the broker and nature of the order placed.
Security Transaction Tax (STT)
The securities transaction tax is a tax levied on sale/purchase of securities (other than debt securities or debt mutual fund). Every recognised stock exchange or trustee of a mutual fund or lead merchant banker (in case of IPO) is required to collect the STT from purchaser or seller of the securities, as the case may be, and, subsequently remit the same to the Central Government. STT collected during a calendar month is required to be paid to the Central Government by 7th day of the month immediately following the said calendar month.
Stamp Duty
Stamp duty is levied for transferring shares and securities from one person to another. Stamp duty is levied by States, thus, the rate of duty varies from state to state. However, with effect from April 1, 2020, stamp duty are levied at unified rates across India in respect of listed securities. The same rate applies even in case of off-market transactions.
CH. 11 : TAXATION OF EQUITY PRODUCTS
Exchange Charges
This charge is levied by the stock exchanges of India. Transaction charges are levied on both sides of the trading and are same for both intraday and delivery.
SEBI Turnover Charges
Securities Exchange Board of India (SEBI) is the security market regulator, which forms rules and regulations for the stock exchanges. Turnover charge of Rs. 10 per crore is levied by SEBI for regulating the markets. This charge is levied on both sides of transaction, i.e., while buying and selling.
Depository Participant (DP) Charges
NSDL (National Securities Depository Limited) and CDSL (Central Depository Services Limited) are two stock depositories in India. The depositaries hold shares and securities in electronic form on behalf of the shareholder and facilitate exchange thereof between buyer and seller. When a person buys shares, such shares are credited in DEMAT account of that person and when he sells such shares to someone else, they are debited from his DEMAT account. Depositories levy a charge plus GST (irrespective of quantity) for this facility on the day the securities are debited from DEMAT Account.
The depository participants form the bridge between the investors and the depository as investors cannot directly approach the depository. Therefore, the depository charges fee from the depository participant and who in turn, charge the investors.
Goods and Services Tax (GST)
It is levied on the amount of brokerage, exchange transaction charges and clearing charges. At present, the GST is charged at the rate of 18% on the amount of brokerage, transaction and clearing charges.
11.2.2 Tax on dividend
Dividend received by a resident shareholder is taxable in his hands at the applicable rates. A resident shareholder is allowed a deduction of interest expenditure incurred to earn that dividend income to the extent of 20% of total dividend income. No further deduction shall be allowed for any other expenses including commission or remuneration paid to a banker or any other person for the purpose of realising such dividend.
MODULE 9 : TAXATION
Where the dividend is received by a non-resident person or foreign company (including foreign portfolio investors (FPIs) and Non-resident Indian Citizens), the dividend shall be taxable in their hands at special rates, subject to provisions of DTAA. However, no expenditure shall be allowed to be deducted from such income. Further, deduction under Chapter-VIA, that is, Sections 80C to 80U, shall not be allowed from such income.
As per DTAA, dividend income is generally chargeable to tax in the source country as well as the country of residence of the assessee and, consequently, country of residence provides a credit of taxes paid by the assessee in the source country. Thus, the dividend income shall be taxable in India as per provisions of the Act or as per relevant DTAA, whichever is more beneficial.
As per most of the DTAAs India has entered into with foreign countries, the dividend is taxable in the source country in the hands of the beneficial owner of shares at the rate ranging from 5% to 15% of the gross amount of the dividends.
11.2.3 Some important aspects
Period of holding
The tax treatment of gains or losses arising from the sale of listed equity shares depends upon whether the gains are long-term or short-term. Shares which are listed on the recognised stock exchange in India are treated as a short-term capital asset if they are held for not more than 12 months immediately preceding the date of transfer. In other cases, they are treated as long term capital assets.
Securities held in Physical Form
If listed shares or securities are sold through brokers, the date of the broker’s note is treated as date of transfer, provided the contract is followed up by delivery. Thus, the period of holding should be counted from the date of purchase to the date of the broker’s note.
In case the transaction takes place directly between the parties and not through the stock exchange, the date of the contract of sale as declared by the parties is treated as the date of transfer, provided it is followed by the actual delivery of shares and the transfer deeds.32
32. Circular No. 704, dated 28-4-1995.
CH. 11 : TAXATION OF EQUITY PRODUCTS
Securities held in Demat Form
As per Section 45(2A) the period of holding of securities held in Demat Form shall be determined as per First-In-First-Out (FIFO) Method.33 It implies that the securities that first entered into the Demat account are deemed to be the first to be sold out.
In other words, the securities acquired last will be taken to be remaining with the assessee while securities acquired first will be treated as sold. For determining the period of holding, the contract note or Broker’s note shall be considered provided such transactions are followed by delivery of shares and transfer deeds.
In the depository system, the investor can open and hold multiple accounts. In such a case, where an investor has more than one security account, FIFO method will be applied account-wise. This is because where a particular account of an investor is debited for sale of securities, the securities lying in his other account cannot be construed to have been sold as they continue to remain in that account.
If in an existing account of Demat stock, the old physical stock is dematerialized and entered at a later date, under the FIFO method, the basis for determining the movement out of the account is the date of entry into the account.
Example 1: Date of credit in Demat account Date
1-6-2020 25-05-2020 Purchased directly in Demat Form 2,000
5-6-2020 01-11-2005 Shares certificates Dematerialized 5,000
10-6-2020 10-6-2020 Purchased directly in Demat form 4,000
15-6-2020 01-05-2001 Shares certificates Dematerialized 3,000
If 2,500 shares are sold from this account, then the cost of acquisition of first 2,000 shares shall be calculated from 25-5-2020, whereas the balance 500 shares will be treated as having been acquired on November 1, 2005, at the relevant cost. This is the effect of the FIFO method.
11.2.4 Tax on long-term capital gains as per section 112A
Earlier the long-term capital gains arising from the sale of listed equity shares were exempt under section 10(38) of the Income Tax Act. In Finance Act, 2018, the long-
33. Circular No. 768, Dated June 24, 1998.
MODULE 9 : TAXATION
term capital gains arising from the sale of listed equity shares were made taxable. Such long-term capital gain is chargeable to tax at different rates depending upon the year of acquisition and the payment of STT.
Rate of tax
As per the Finance Act 2024, where the total income of the assessee includes longterm capital gain arising from transfer of listed equity shares, no tax shall be charged on such long-term capital gain if the aggregate amount of such gain during the year is upto Rs. 1,25,000. If the amount of capital gain exceeds Rs. 1,25,000 then the excess amount shall be chargeable to tax at concessional rate of 12.50% (plus applicable surcharge and cess) under section 112A of the Income Tax Act. However, this section applies only when securities transaction tax is paid at the time of acquisition and at the time of transfer of equity shares except in the following cases:
Exception 1: Transaction undertaken on a stock exchange located in IFSC
The condition of payment of STT shall not be applicable if the transfer is undertaken on a recognised stock exchange located in an International Financial Services Centre (IFSC). This concession is available only when the consideration for such transaction is received or receivable in foreign currency.
Exception 2: If STT is not paid at the time of acquisition
The benefit of the concessional tax rate is available in case of transfer of equity shares if STT is chargeable both at the time of transfer and at the time of acquisition of shares. The CBDT34 has relaxed this condition of payment of STT at the time of acquisition in the following scenarios:
(a) Shares are acquired before 1-10-2004;
(b) The acquisition has been approved by the Supreme Court, High Court, NCLT, SEBI or RBI;
(c) The acquisition by any non-resident is in accordance with FDI guidelines issued by the Government of India;
(d) The acquisition is done by an Investment Fund or Venture Capital Fund or a Qualified Institutional Buyer;
(e) The acquisition is done through a preferential issue to which SEBI (Issue of Capital and Disclosure Requirements) Regulations does not apply;
34. Notification No. 60/2018, dated 1-10-2018.
(
CH. 11 : TAXATION OF EQUITY PRODUCTS
f) The acquisition is done through an issue of share by a company;
(g) The acquisition of shares is made by the scheduled banks, reconstruction or securitisation companies or public financial institutions during their ordinary course of business;
(
h) The acquisition is done under the ESOP or ESPS scheme framed under SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999
(i) The acquisition of shares is made as per SEBI (Substantial Acquisition of Shares and Takeovers) Regulation, 2011;
(
(
j) The acquisition is made from the Government; and
k) The acquisition is made by mode of transfer referred to in Section 47 or Section 50B or Section 45(3) or Section 45(4) of the Income Tax Act, if the previous owner or transferor of such shares has acquired shares by any of the modes given in this list.
Cost of acquisition of shares acquired on or before 31-01-2018
The Finance Act 2018 grand-fathered the investments made on or before 31-012018 as the long-term capital gains arising from the sale of equity shares chargeable to STT were previously exempt from tax. The concept of grandfathering under this provision works as per the following mechanism.
If equity shares were acquired on or before 31-01-2018, the cost of acquisition of such shares or units shall be higher of the following:
(a) The actual cost of acquisition of equity shares; or
(b) Lower of the fair market value of such asset as on 31-01-2018 or full value of the consideration received as a result of the transfer of equity shares.
In case of listed equity shares, the highest price of share quoted on a recognized stock exchange as on 31-01-2018 is taken as the fair market value. If there is no trading in such share on such exchange on 31-01-2018, the highest price of such share on a date immediately preceding 31-01-2018 when such share was traded shall be the fair market value.
However, the fair market value of the following equity shares will be the cost of acquisition indexed by the cost inflation index of financial year 2017-18 and divided
MODULE 9 : TAXATION
by the cost inflation index of the year in which the shares were acquired or the FY 2001-02. whichever is later:
(
a) Shares are not listed on recognised stock exchange on 31-01-2018 but listed on such exchange on the date of transfer; or
(
b) Shares listed on a recognised stock exchange on the date of transfer and which became the property of the assessee in consideration of share which is not listed on such exchange as on 31-01-2018 by way of transaction not regarded as transfer under Section 47.
In general, cost of acquisition of the bonus shares are taken to be nil, however, if bonus shares are complying with the conditions prescribed in section 112A, the cost of acquisition shall be computed in the manner described above.
Let’s understand how to compute long-term capital gains with the help of the following examples.
Scenario 1: An equity share is acquired on 01-01-2017 at Rs. 100, its fair market value is Rs. 200 on 31-01-2018 and it is sold on 01-01-2025 at Rs. 250.
As the actual cost of acquisition is less than the fair market value as on 31-01-2018, the fair market value of Rs. 200 will be taken as the cost of acquisition and the long-term capital gain will be Rs. 50 (Rs. 250 - Rs. 200).
Scenario 2: An equity share is acquired on 01-01-2017 at Rs. 100, its fair market value is Rs. 200 on 31-01-2018 and it is sold on 01-01-2025 at Rs. 150.
In this case, the actual cost of acquisition is less than the fair market value as on 31-01- 2018. However, the sale value is also less than the fair market value as on 31-01-2018. Accordingly, the sale value of Rs. 150 will be taken as the cost of acquisition and the long-term capital gain will be nil (Rs. 150 - Rs. 150). In other words, grandfathering cannot result in a long-term capital gain turning into a longterm capital loss, just because the sale price is lower than the fair market value as on 31-01-2018, but higher than the original cost of acquisition.
Scenario 3: An equity share is acquired on 01-01-2017 at Rs. 100, its fair market value is Rs. 50 on 31-01-2018 and it is sold on 01-01-2025 at Rs. 150.
In this case, the fair market value as on 31-01-2018 is less than the actual cost of acquisition, and therefore, the actual cost of Rs. 100 will be taken as the actual cost of acquisition and the long-term capital gain will be Rs. 50 (Rs. 150 - Rs. 100).
CH. 11 : TAXATION OF EQUITY PRODUCTS
Scenario 4: An equity share is acquired on 01-01-2017 at Rs. 100, its fair market value is Rs. 200 on 31-01-2018 and it is sold on 01-01-2025 at Rs. 50.
In this case, the actual cost of acquisition is less than the fair market value as on 31-01-2018. The sale value is less than the fair market value as on 31-01-2018 and also the actual cost of acquisition. Therefore, the actual cost of Rs. 100 will be taken as the cost of acquisition in this case. Hence, the long-term capital loss will be Rs. 50 (Rs. 50 - Rs. 100) in this case.
Cost of acquisition of shares acquired on or after 01-02-2018
The cost of acquisition of equity shares, which are acquired on or after 01-02-2018, shall be computed as per general principles of Section 55, i.e., the actual cost for which it is acquired by the assessee.
11.2.5
Tax on long-term capital gain as per section 112
Long-term capital gains arising from the sale of equity shares that are not covered under section 112A (listed Equity shares) are taxable at the same rate of 12.50% under section 112. Long term capital gains on Listed equity shares satisfying the conditions mentioned in section 112A (primarily that securities transaction tax has been paid both on acquisition and sale or transaction is undertaken in foreign currency on a recognized stock exchange located in an IFSC) pay the same rate of tax @12.50% but with the first Rs. 1.25 lakh not being charged in that case.
11.2.6 Tax on short-term capital gains as per section 111A
Short-term capital gains arising from the sale of listed equity shares satisfying the conditions mentioned there (primarily that securities transaction tax has been paid both on acquisition and sale or transaction is undertaken in foreign currency on a recognized stock exchange located in an International Financial Services Centre) is chargeable to tax at concessional rate of 20% if the transaction is chargeable to Securities transaction tax or transaction is undertaken in foreign currency on a recognized stock exchange located in an International Financial Services Centre.
However, no deduction under Sections 80C to 80U shall be allowed from shortterm capital gains covered under section 111A.
Rs. 800/-
