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Income Tax on Shares and Securities in India

Income tax on shares and securities is an important aspect of the Indian tax system. Understanding the taxation rules and regulations related to shares and securities is crucial for investors and traders. In this comprehensive guide, we will explore the income tax provisions for shares and securities in India, including the classification of capital gains, the period of holding, and the tax rates applicable to different classes of assets.

Introduction to Income Tax on Shares and Securities

Shares and securities are treated as capital assets if trading of such assets is not a mainline business. Shares are issued by companies to raise capital employed, and they can be classified into two types: equity shares and preference shares. On the other hand, securities encompass various instruments issued by companies to raise capital employed, such as debentures, deposits, and bonds.

Classification of Capital Gains

The period of holding (POH) is a crucial factor in determining whether the capital gain is considered long term or short term. The POH varies for different types of shares and securities. Here is a breakdown of the POH for different classes of assets:

Class of Asset

Short-Term POH

Long-Term POH

Listed Shares

Less than 12 months

More than 12 months

Unlisted Shares

Less than 24 months

More than 24 months

Listed Securities other than shares

Less than 12 months

More than 12 months

Unlisted Securities other than shares

Less than 36 months

More than 36 months

Tax Provisions for Different Classes of Shares and Securities

The Income Tax Act, 1961, provides different provisions for different classes of shares and securities. In this article, we will focus on Class I, which includes listed shares, and Class II, which includes unlisted shares, listed securities other than shares, and unlisted securities other than shares. Here are the tax provisions for these classes:

Class I: Listed Shares

  • Short-term capital gains (STCG) from listed equity shares are taxable at a rate of 15% under Section 111A.
  • Long-term capital gains (LTCG) from listed equity shares are taxable at a rate of 10% on the amount exceeding one lakh rupees under Section 112A.

Class II: Unlisted Shares, Listed Securities other than shares, and Unlisted Securities other than shares

  • Short-term capital gains from Class II assets are taxed at the normal tax rates applicable to other capital assets.
  • Long-term capital gains from Class II assets are taxable at a rate of 20% under Section 112.

Changes in Taxation of Listed Equity Shares

Before 2018, any type of long-term capital gain from listed equity shares used to be tax-free. However, in 2018, the Finance Minister introduced Section 112A to tax such transactions. Under Section 112A, long-term capital gains from listed equity shares are exempt up to Rs. 1,00,000, and the amount exceeding Rs. 1,00,000 is taxable at a rate of 10%.

Income Tax on Shares under Section 111A

Short-term capital gains arising from the trading of listed equity shares are taxable at a rate of 15%. An assessee must pay Security Transaction Tax (STT) on the sale of such shares. Deductions are not allowed for this type of income, but deficiency and rebate under Section 87A are allowed.

Calculation of Income Tax on Shares

The calculation of short-term capital gains on shares follows the same method, regardless of the tax rate. Here is the step-by-step calculation:

  1. Full Value of Consideration (FVC): This is the total amount received from the sale of shares.
  2. Expenses Incurred: Subtract any expenses incurred in relation to the sale of shares from the FVC.
  3. Net Value of Consideration: Subtract the expenses incurred from the FVC.
  4. Cost of Acquisition: This is the original cost of acquiring the shares.
  5. Cost of Improvement: If any improvements were made to the shares, subtract the cost of improvement from the Cost of Acquisition.
  6. Gross Short-term Capital Gains: Subtract the Cost of Acquisition and the Cost of Improvement from the Net Value of Consideration.
  7. Exemption under Section 54B/54D: If eligible, subtract any exemption amount under these sections from the Gross Short-term Capital Gains.
  8. Taxable Short-Term Capital Gains: The final amount after subtracting the exemption is the taxable short-term capital gains.

Taxation on Shares under Section 112A

Long-term capital gains arising from the trading of listed equity shares are exempt up to Rs. 1,00,000, and the amount exceeding Rs. 1,00,000 is taxable at a rate of 10%. An assessee must pay Security Transaction Tax on the sale of such shares. Deductions are not allowed for this type of income, and rebate under Section 87A is not allowed.

Calculation of Tax on Shares

The calculation of long-term capital gains on shares follows a specific method. Here is the step-by-step calculation:

  1. Full Value Consideration: This is the total amount received from the sale of shares.
  2. Selling Expenses: Subtract any selling expenses from the Full Value Consideration.
  3. Cost of Acquisition of Listed Shares: This is the original cost of acquiring the shares. Indexation is not allowed for shares acquired before February 1, 2018.
  4. LTCG under Section 112A: Subtract the Selling Expenses and the Cost of Acquisition from the Full Value Consideration. This is the Long-Term Capital Gains under Section 112A.

Note: For listed equity shares acquired before February 1, 2018, the cost of acquisition is determined by comparing the actual cost, the full value consideration, and the fair market value on January 31, 2018. The higher of the actual cost and the lower of the full value consideration and the fair market value on January 31, 2018, is considered as the cost of acquisition.

8. Conclusion

Understanding the income tax provisions for shares and securities in India is essential for investors and traders. By knowing the classification of capital gains, the period of holding, and the tax rates applicable to different classes of assets, individuals can make informed decisions and ensure compliance with the Income Tax Act, 1961. It is advisable to consult a tax professional or refer to the official guidelines for accurate and up-to-date information on income tax on shares and securities in India.

 

author

The Tax Heaven

Mr.Vishwas Agarwal✍📊, a seasoned Chartered Accountant 📈💼 and the co-founder & CEO of THE TAX HEAVEN, brings 10 years of expertise in financial management and taxation. Specializing in ITR filing 📑🗃, GST returns 📈💼, and income tax advisory. He offers astute financial guidance and compliance solutions to individuals and businesses alike. Their passion for simplifying complex financial concepts into actionable insights empowers readers with valuable knowledge for informed decision-making. Through insightful blog content, he aims to demystify financial complexities, offering practical advice and tips to navigate the intricate world of finance and taxation.

Frequently Asked Questions

Tax evasion is the criminal act of individuals or companies trying to avoid paying their taxes. This can involve hiding or inventing income, falsifying deductions without evidence, or not reporting cash transactions.

Tax evasion involves hiding or inflating income, creating false deductions without evidence, and not reporting cash transactions. Individuals use different tactics to evade taxes, such as submitting fake tax returns, smuggling, forging documents, and engaging in bribery.

Tax evasion involves avoiding paying taxes on income or revenue by deceiving the authorities, while tax avoidance aims to legally reduce taxable income by utilizing government-sanctioned investments to earn money without incurring taxes.

Best Ways To Avoid Tax Evasion

  1. Reducing tax rates.
  2. Make more simplified laws and simplified system.
  3. Design a well-organized tax administration structure.
  4. Strengthen anti-corruption policies.
  5. Increase awareness among taxpayers by conducting seminars, conferences and through media.
  6. Design a permanent tax structure.

If many people engage in such activities, it will impact the country's financial status. Therefore, the authorities monitor tax payments closely and impose severe penalties on those who attempt to evade taxes in violation of tax laws.

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