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02 December 2015 | E-Paper

IN THE MARKET

SONU IYER

SHARES

CAPITAL GAINS TAX

EQUITY

How income from shares is taxed

How income from shares is taxed
In The Market | Sonu Iyer
First Published: Wed, Aug 25 2010. 09 00 PM IST

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Updated: Wed, Aug 25 2010. 09 00 PM IST

I recently ran into my friend, Kanika, a full-time homemaker but active in the stock
market. Kanika shared that she enjoys the highs of the stock market, but confessed to
being a little hazy on taxation of income she earns from the stock market. This was my
cue to launch into a monologue on taxation of capital gains on transfer of shares by
individuals and heres how it went:
When to pay taxes? Capital gains arise on transfer of shares and transfer has been
defined in the law to include sale, gift, redemption and exchange. However, the
unrealized gains/losses being reflected in demat account statements are merely
notional and not real income and, hence, not taxable.
Short- or long-term? The holding period of a share from the date of its purchase to the
date of its sale decides whether the gain arising on its transfer is short- or long-term. If
a share is held for at least 12 months, it qualifies as a long-term asset, else it is a shortterm asset. Accordingly, income earned from transfer of sharescapital gainscan be
long-term capital gains (LTCG) or short-term capital gains (STCG).
Computation of capital gains: Capital gains are the difference between the sale
consideration and the cost of acquisition.
The sale consideration is the sales proceeds minus the brokerage or commission paid
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by the seller. However, it is to be noted that the securities transaction tax (STT) paid on
the sale or purchase is not considered an expense that can be reduced from the sales
consideration nor can it be added to the cost.
For a short-term asset, the cost of acquisition refers to the actual purchase price. Any
amount incurred on brokerage can be added to it. But for a long-term asset, the cost
may be indexed for inflationthe cost is proportioned on the basis of the Cost Inflation
Index (CII) between the year of purchase and sale.
For bonus shares, the cost of acquisition is taken to be nil as there is no cost incurred.
For employee stock options, the cost of acquisition is the fair market value on the date
of exercise of options. In case of rights shares issued by a company, the cost of
acquisition would be the actual price paid to acquire these. But if one transfers the
rights in favour of another instead of acquiring them, the capital gains would be the
entire sale consideration.
Are all capital gains taxable? LTCG on transfer of equity shares listed on a stock
exchange in India, where STT has been paid, is tax exempt, while STCG in the same
situation is taxed at a concessional rate of 15.45% (including education cess).
As for unlisted equity shares, STCG is taxable at the slab rates prescribed for individuals
ranging from 10.3% to 30.9% and STCG is taxable at a concessional rate of 20.6%.
However, exemption is available for LTCGs if the capital gain is invested in bonds
issued by the National Highways Authority of India or the Rural Electrification Corp. Ltd
within six months of the transfer, subject to other conditions.
For example, Kanika bought shares on 20 January 2009 for Rs10,000 and sold it on 20
November 2009 for Rs12,000, the income of Rs2,000 (Rs12,000 minus Rs10,000) would be
STCG as the period of holding is less than 12 months. But had Kanika sold these share
on 15 March 2010, that is after 12 months, the income earned will be LTCG with the cost
being indexed. So, in this case, the indexed cost of acquisition will be Rs10,000/582 (CII
for FY09) multiplied by 632 (CII for FY10), which comes to Rs10,589 and LTCG will be
Rs1,411 (Rs12,000 minus Rs10,589). Kanika pays no taxes if the LTCG arose on the sale of
listed equity shares, where STT has been paid or pays only 15.45% on STCG. If these
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were unlisted shares, then for STCG she may pay tax at the applicable slab rate but for
LTCG, at 20.6%.
Are gifted shares considered income? Any gifts received by an individual after 1
October 2009 in the form of shares will be taxable in the hands of the recipient, if the
market value exceeds Rs50,000. However, there are some exceptions in the case of
individuals to exclude gifts received from a relative or on the occasion of marriage or in
contemplation of death or through a will. The change in law seeks to plug bogus
transfers, but exceptions have been provided to protect genuine transfers.
And when these shares are sold, the cost of acquisition for calculation of capital gains
will be that of the previous holder who had gifted the shares.
What are the tax implications on capital loss? In case of loss on transfer of shares, all is
not lost; the same can be set off from other capital gains or carried forward to the future
years for set off against capital gains. Long-term capital losses cant be set off with
STCG, while short-term capital loss may be set off against LTCG.
The proposed Direct Taxes Code: The tax laws are in for a big change with the Direct
Taxes Code expected to be effected from 1 April 2011. The categorization of assets into
short term and long term has been done away with. Therefore, all the gains will be
aggregated with other incomes earned and taxed as per the slab basis applicable to the
individual taxpayer.
Further, LTCG on transfer of listed equity shares or units of equity-oriented funds would
be eligible to a deduction at a specified percentage. Any loss arising on the transfer of
such assets would also be reduced.
Here is wishing Kanika and the readers good tidings at the stock exchange and
remember to get the taxes right even as you make money.

Sonu Iyer is tax partner, Ernst & Young.

We welcome your comments at mintmoney@livemint.com
First Published: Wed, Aug 25 2010. 09 00 PM IST
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