Stock Market And Taxation

Securities Transaction Tax (STT)

STT is levied on the value of certain transactions. These transactions include the purchase and sale of equity shares, purchase and sale of units of an equity oriented fund, sale of a unit of an equity oriented fund to the mutual fund and sale of a derivative. The rates applicable on different transactions differ depending on the type of security that is traded and whether the transaction is delivery based or not. Further, in some cases the seller is required to pay the tax and in other cases the buyer has to pay (see table below).

1. Surcharge: Nil; Education cess: Nil

2. Note: STT is not applicable in the case of government securities, bonds, debentures, units of mutual fund other than equity oriented mutual fund. In such cases, tax treatment of short-term and long-term capital gains shall be as per normal provisions of law.

3. In case of redemption or repurchase of units of an equity fund the rate of STT leviable is 0.25%

Long term capital gains

If equity or preference shares of a company are held for more than 12 months before being sold, then they are known as long-term capital assets. The gains which arise on the sale of such assets are known as long term capital gains. No tax is applicable to long-term capital gains arising on the transfer of equity shares from 1st October 2004, if such transaction is covered by Securities Transaction Tax under Section 10(38).

Short-term capital gains

If equity or preference shares of a company are held for less than 12 months before being sold, then they are known as short-term capital assets. The gains which arise on the sale of such assets are known as short term capital gains. Such gains are taxed at the rate pf 10 per cent plus a surcharge and an education cess.Short term capital gains cannot be set off by investing in capital gains bonds under Section 54EC. Investors could avail themselves of this benefit only when it comes to long-term capital gains.

Short and long term capital losses

A capital loss (short-term/long-term) can be carried forward for a maximum period of eight 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.

Capital gains tax on bonus/rights shares

Bonus shares

A bonus on equity shares has a zero (nil) cost of acquisition. At the time of sale of bonus shares, the holding period is calculated from the date of allotment of bonus shares and the net sales proceeds are treated as a capital gain and taxed accordingly.

Rights shares

The cost of acquisition of the rights issue on equity shares is the amount paid for acquiring such a right. Here too, the holding period is reckoned from the date of allotment of rights shares and the net sales proceeds are treated as a capital gain and taxed accordingly.

Valuation of capital gains on shares sold in case of multiple demat accounts

In the case of multiple demat accounts, the capital gain on the sale of shares has to be computed on a FIFO basis 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 a one-to-one basis with the particular depository participant (DP).

Capital gains tax on the sale of ’split shares’

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. Capital gains are determined as the difference between the sale price and the proportionately divided cost price and the period of holding determines whether these are short term or long term gains. For instance in the case of a 1:1 split of shares which have been purchased at Rs 100 per share, if each share is sold for Rs 80, within one year after the date of purchase, the cost price is considered as Rs 50 and the sale price is Rs 80. Therefore, short term capital gains tax is applicable on the gain of Rs 30.

Tax on dividend income

Dividend received from investment in shares is not taxable in the hands of the recipient. The company that distributes the dividend is required to pay dividend distribution tax on dividend declared, distributed or paid out.

Tax break on investment in equity

Investing in the IPOs of certain specified infrastructure companies renders you a tax break under section 80C of the income tax act. You can claim a deduction of up to Rs 1 lakh from taxable income for the amount that you invest in such securities.

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Valuation Of Shares and Business

Why Monitor And Review Your Equity Investments

Monitoring Methodologies That Can Be Adopted

When To Sell Your Equity Stocks

Stock Market And Taxation

Process Of Investing In Equity Stocks: Online And Offline

Stock Market Myths

Frequently Asked Questions (FAQs) About Stocks And Stock Market

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