Taxation on various financial instruments. Explained in 5 points.

There are various financial instruments that people invest in today. Each of these financial instruments offer different returns on the capital amount invested. Accordingly it is important to note that the taxability of the return/gains on financial instruments differ from one another.

In this article, I shall discuss on the taxation aspects of various financial instruments (liquid & non liquid) and their effect on the net return to the investor.

1. Tax on Listed Shares -These shares are those on which securities transaction tax (STT) has been paid. Gains on such shares can be classified as short term and long term. If listed shares are held for longer than a year after their purchase, then such shares will be classified as long term shares. Any capital gains earned on such long term shares will be completely exempt from tax. Adversely, if listed shares are held for lesser than one year after their purchase, then such shares will be classified as short term shares. Capital gains earned on such shares are termed as short term capital gains and taxed at 15%.

2. Tax on Unlisted Shares -These are shares on which no securities transaction tax (STT) has been paid. Long term capital gains on such shares are taxed @ 20% taking into account indexation of the purchase price or at 10% without taking into account indexation of the purchase price. Short term capital gains on such shares are taxed @ normal rates of tax (i.e. as per the slab rates applicable to the individual).

3. Tax on Debentures - Debentures can be classified as listed or unlisted debentures. Short term capital gain on sale of listed or non listed debentures is taxed at normal rates i.e. it is taxed as per the income tax slabs laid down in the Income Tax Act. All Long term capital gains on sale listed or non listed debentures are taxed at the rate of 20%

4. Tax on Equity oriented Mutual Funds - Equity oriented MF’s if held for longer than one year are termed as long term and if held for lesser than one year, are termed as short term. Long term capital gains on equity oriented MF’s are exempted from tax. Short term capital gains on such funds are taxed @ 15%.


5. Tax on Debt funds - Debt funds are taxed differently from equity oriented mutual funds. A debt MF if held for longer than one year is termed as a long term debt fund and if held for lesser than one year is termed as short term. Capital gains on Long term debt funds can be taxed @ 20% taking into account indexation of the purchase price or @ 10% without taking into account indexation of the purchase price. On the other hand, Short term capital gains on debt funds will be taxed at the normal slab rates applicable to the investor.

Exemptions.

Exemption from tax on long term capital gains from sale of debentures and sale of unlisted shares can be claimed by investing the entire sale proceeds either by buying a residential house property or buy investing the capital gains in NHAI or REC Bonds.