Retail investor participation in the Indian Stock Market has been steeply rising over the past two years. Stock investments offer returns in the form of dividends and capital appreciation. The tax implications on such income in the hands of individual taxpayers are worth noting.
The distribution of profits by a company to its shareholders is known as a dividend. The dividend distributed by domestic companies is taxed in the hands of shareholders. The aggregate dividends received during the year have to be shown as Income from Other Sources and the taxes paid at applicable slab rates. Companies have to deduct tax (TDS) at 10% if the annual dividend paid to resident shareholders exceeds Rs 5,000, and for NRIs, TDS u/s 195 is applicable. Resident investors can’t claim any deduction from dividend income except interest, which has been incurred to earn the dividend to the extent of 20% of such an income.
Another form of income is capital appreciation or the gains from the sale or transfer of shares. It is taxed as either short-term or long-term, depending upon the period of holding. Gain on sale of listed shares held for over twelve months is considered Long-Term Capital Gain (LTCG) and taxed at 10%. To benefit the small-time investors, if the aggregate capital gain per year is less than Rs One Lakh, then such an amount is exempt from tax. For example, if Mr A earns an LTCG of Rs 2,50,000, he has to pay tax at 10% on Rs 1,50,000.
It is important to note that the benefit of indexation is not available for LTCG on the sale of listed shares. For instance, Mr A purchases shares at Rs 2,500 in 2018 and sells them for Rs 4,000 (net of brokerage) in 2021. He has to pay a tax on the difference amount of Rs 1,500.
Gains on sale of Listed Shares held for less than twelve months are considered as Short-Term Capital Gain and taxed at a flat rate of 15% (plus Surcharge and Cess as applicable) irrespective of tax slabs.
In the case of long-term capital gains, the above concessional tax rates are applicable only when security transaction tax (STT) on both - acquisition and the transfer of the shares - is paid. It implies that if the shares are sold as off-market transactions, then the gains are taxed at the regular tax rates as applicable.
What if one incurs a loss on the transfer of shares? Any short-term capital loss from the sale of equity shares can be set off during the year or can be carried forward to 8 subsequent years, and be set off against any short-term or long-term capital gains.
The long-term capital loss can be set off or carried forward to subsequent eight years and be set off against long-term capital gains only. Remember, the carry forward of loss is allowed only if Income Tax Returns are filed within the due date. Hence, filing returns within the due date is essential.
Until 2018, the LTCG from the sale of listed equity shares was exempt from tax. So, those who sell the shares which were bought before February 1, 2018, can consider the cost of purchases as the higher of either the (a) actual cost of purchases and (b) the lower of fair market value (FMV) and the full value of the consideration received on the sale.To illustrate, Mr A acquired shares in 2017 for Rs 1,500, its fair market value as of January 31, 2018, was Rs 2,000, and he sold it in 2021 for Rs 3,000. In this case, FMV of Rs 2,000 can be considered the cost of acquisition as it is lower than the sale value but higher than the actual cost of purchases, thus resulting in an LTCG of Rs 1,000.
Can a taxpayer claim deductions against Capital Gains u/s 80C, such as a premium on Life Insurance or U/s 80D, such as a premium on medical insurance or payment of Security Transaction Tax (STT)? These deductions are not allowed against Capital Gains under Sections 111A, 112 and 112A.
Shares held in unlisted companies. Due to the increased ESOP transactions in unlisted companies, momentum has picked up in the sale of unlisted equity shares. The period of holding for considering such shares as LTCG is 24 months, and the tax rate to be applied is 20% after indexation of the purchase cost.
(The writer is a Chartered Accountant and Registered Valuer)
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