Confused about taxation of any
income arising in respect of shares, be it capital gains on sale of such shares or dividends received?
People generally think that any income received in respect of shares is exempt from tax. This is really not
so.
In order to make matter clear for the readers, I have tried to explain the tax implications of income from shares in this article. There are many aspects relating to taxation of shares in India. First let us take up the provision for computing capital gains and tax rates on capital gains on sale of shares.
Holding Period requirement long-term and short-term:
Generally, profits arising on sale of any capital assets are treated as long-term if the same have been held for 36 months or more on the date of sale.
However, in case of shares in any Company, the holding period requirement is only 12 months or more in order to make such profits as long-term. It is important to note that the requirement of lower holding period is applicable for shares in any Company and not necessarily an Indian Company.
Moreover even shares held in a private limited company will become long- term if held for 12 months or more on the date of sale of such shares.
Tax rate in case of capital gains arising on sale of equity shares listed on Indian Stock Exchanges:
As per the present provisions of income-tax laws, any long-term capital gains arising on sale of equity shares listed on Indian stock exchange and sold through a stock-broker are fully exempt from income tax.
This exemption is not available in case the listed shares are sold outside the stock exchange platform or cases where the shares have been tendered under buyback scheme or under any open offer.
For claiming this exemption, the equity shares should be sold on the platform of stock exchange in India on which Security Transaction Tax (STT) has been paid. In order to verify whether the shares sold by you are subjected to STT, please see the bill issued by your share broker.
An item of STT will be there in the invoice raised by the broker in case security transaction tax is levied on your sale transaction.
All the transactions of equity shares executed on stock exchange are liable for STT. It is interesting to note that this exemption for long-term capital gains is not available in case the shares are sold on any stock exchanges outside India.
It is also pertinent to note that this exemption is available only in respect of equity shares listed on Indian Stock Exchange whether it is an Indian Company or a foreign company. This way say shares of Standard Chartered Bank, a foreign company, which are listed in India enjoy this exemption.
In case of profit on equity shares sold on stock exchanges in India held for less than 12 months are s taxed at a flat rate of 15 percent. It is also interesting to note that even in cases where the applicable slab tax rate is 10 percent, you will still have to pay tax of 15 percent on such short- term capital gains.
This rate still will be 15 percent even in case the slab rate applicable to you is 30 percent. In case your other income excluding this short- term capital gains is less than basic exemption limit, you will be entitled to take the benefit of such shortfall in the basic exemption limit while calculating your tax liability.
Tax in respect of capital gains arising on sale of shares other than equity shares transacted on Indian Exchange:
All transactions of shares do not take place on the plat form of stock exchange. This would cover transaction of unlisted shares as well as transactions of listed shares in the form of open offer or buy back by of these shares by the company directly.
Any capital gains arising on sale of such transactions will still be treated as long-term if the shares have been held for 12 months or more on the date of sale. In case the shares are sold within 12 months, the short-term capital gains arising on such transaction shall be included in your regular income and shall be taxed at the slab rate applicable to you.
Generally the tax-rate applicable in case of long-term capital gains is 20 percent on the indexed capital gains. However in case the long-term capital gains calculated with indexation is higher than 10 percent of unindexed capital gains, your liability on such long-term capital gains shall be restricted to 10 percent only in certain cases.
This option of choosing between 20 percent on indexed long-term capital gains or 10 percent of unindexed capital gains is available only in case of listed shares which are transacted outside stock exchange. So in case you had tendered shares of Hindustan Uniliver under buyback scheme, your liability would be restricted to 10 percent of profit made by you in case the shares were held for 12 months or more.
In case the shares sold are not listed in India, this option of choosing between 10 percent unindexed and 20 percent indexed capital gains is not available. In case your other income excluding these long-term capital gains is less than basic exemption limit, you will be entitled to take the benefit of such shortfall in the basic exemption limit here also.
However in case of short-term gains, though the shares are listed in India, your liability on such short-term gains will depend on the slab rate applicable to you.
Taxation of Dividends received on shares:
Any dividend received on shares held in Indian company is fully exempt from payment of tax. However the company is required to pay a tax called Dividend Distribution Tax on such dividend at the rate of 15 percent on such dividend. So effectively 15 percent tax on your behalf has been paid by the company on the dividends received by you.
Hope the article has eased your confusion about the taxability and the rate of tax on sale of shares. Your feedback and queries are welcome.
In order to make matter clear for the readers, I have tried to explain the tax implications of income from shares in this article. There are many aspects relating to taxation of shares in India. First let us take up the provision for computing capital gains and tax rates on capital gains on sale of shares.
Holding Period requirement long-term and short-term:
Generally, profits arising on sale of any capital assets are treated as long-term if the same have been held for 36 months or more on the date of sale.
However, in case of shares in any Company, the holding period requirement is only 12 months or more in order to make such profits as long-term. It is important to note that the requirement of lower holding period is applicable for shares in any Company and not necessarily an Indian Company.
Moreover even shares held in a private limited company will become long- term if held for 12 months or more on the date of sale of such shares.
Tax rate in case of capital gains arising on sale of equity shares listed on Indian Stock Exchanges:
As per the present provisions of income-tax laws, any long-term capital gains arising on sale of equity shares listed on Indian stock exchange and sold through a stock-broker are fully exempt from income tax.
This exemption is not available in case the listed shares are sold outside the stock exchange platform or cases where the shares have been tendered under buyback scheme or under any open offer.
For claiming this exemption, the equity shares should be sold on the platform of stock exchange in India on which Security Transaction Tax (STT) has been paid. In order to verify whether the shares sold by you are subjected to STT, please see the bill issued by your share broker.
An item of STT will be there in the invoice raised by the broker in case security transaction tax is levied on your sale transaction.
All the transactions of equity shares executed on stock exchange are liable for STT. It is interesting to note that this exemption for long-term capital gains is not available in case the shares are sold on any stock exchanges outside India.
It is also pertinent to note that this exemption is available only in respect of equity shares listed on Indian Stock Exchange whether it is an Indian Company or a foreign company. This way say shares of Standard Chartered Bank, a foreign company, which are listed in India enjoy this exemption.
In case of profit on equity shares sold on stock exchanges in India held for less than 12 months are s taxed at a flat rate of 15 percent. It is also interesting to note that even in cases where the applicable slab tax rate is 10 percent, you will still have to pay tax of 15 percent on such short- term capital gains.
This rate still will be 15 percent even in case the slab rate applicable to you is 30 percent. In case your other income excluding this short- term capital gains is less than basic exemption limit, you will be entitled to take the benefit of such shortfall in the basic exemption limit while calculating your tax liability.
Tax in respect of capital gains arising on sale of shares other than equity shares transacted on Indian Exchange:
All transactions of shares do not take place on the plat form of stock exchange. This would cover transaction of unlisted shares as well as transactions of listed shares in the form of open offer or buy back by of these shares by the company directly.
Any capital gains arising on sale of such transactions will still be treated as long-term if the shares have been held for 12 months or more on the date of sale. In case the shares are sold within 12 months, the short-term capital gains arising on such transaction shall be included in your regular income and shall be taxed at the slab rate applicable to you.
Generally the tax-rate applicable in case of long-term capital gains is 20 percent on the indexed capital gains. However in case the long-term capital gains calculated with indexation is higher than 10 percent of unindexed capital gains, your liability on such long-term capital gains shall be restricted to 10 percent only in certain cases.
This option of choosing between 20 percent on indexed long-term capital gains or 10 percent of unindexed capital gains is available only in case of listed shares which are transacted outside stock exchange. So in case you had tendered shares of Hindustan Uniliver under buyback scheme, your liability would be restricted to 10 percent of profit made by you in case the shares were held for 12 months or more.
In case the shares sold are not listed in India, this option of choosing between 10 percent unindexed and 20 percent indexed capital gains is not available. In case your other income excluding these long-term capital gains is less than basic exemption limit, you will be entitled to take the benefit of such shortfall in the basic exemption limit here also.
However in case of short-term gains, though the shares are listed in India, your liability on such short-term gains will depend on the slab rate applicable to you.
Taxation of Dividends received on shares:
Any dividend received on shares held in Indian company is fully exempt from payment of tax. However the company is required to pay a tax called Dividend Distribution Tax on such dividend at the rate of 15 percent on such dividend. So effectively 15 percent tax on your behalf has been paid by the company on the dividends received by you.
Hope the article has eased your confusion about the taxability and the rate of tax on sale of shares. Your feedback and queries are welcome.
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