During the time slot of COVID-19 Pandemic record breaking Demat accounts and Trading accounts have been opened in Share Market in India. In the past more and more people use to invest their funds in FDs , Post Offices, Bonds etc. as a traditional method in search of some additional Income, due to increasing inflation and decreasing interest rates , however now people are increasing their investment in Equity shares and Equity Oriented funds instead of the traditional methods.
As per SEBI’s data, till January 2021 total 15 crores demat accounts have been opened in India out of that approx. 1.42 crores new demat accounts have been opened in Year 2021 itself. Especially due to digital India the techno-savvy youth by sitting at home are able to open demat accounts online by availing the services of Online platforms like Zerodha, Upstox, etc and are undertaking Investing / Trading transactions in Share Market on a wider scale.
Most of the Indian’s savings money are being invested in the Share Market in IPOs. A new demat account or trading account can be opened very easily, due to quick E-KYC , various payment gateways available for making online payments quickly and easily and the “Fear of Missing Out “ among the youth , people getting tempted and inspired by the increasing transactions in NIFTY and SENSEX are investing their capital more and more in Share Market.
You can directly invest in Share market or through mutual funds.
Teenagers, youth, new investors, and investors from small cities and villages are getting their demat account opened and initiating transactions of sales and purchase of shares. People are earning huge profits by investing in shares through Initial Public Offers (IPOs) and selling the same on listing day. However the impact of income tax arising out of Profit / Loss on sales of equity shares is inevitable.
♦ What are equity shares ?
When the constitution of a business is in Company form , its capital is divided into small parts each such part is known as a Share and the total capital is known as Equity Share Capital. Whereas such investors who invests their money in such shares are known as Equity Share holders. Equity Share holders are considered as the owners of the company. They take the risk of capital. However instead of getting interest income at a fixed rate they get dividend on the basis of the profits of the company. Also in case of Public Companies if the shares are listed in Stock Exchange ( BSE & NSE) then the market price of the share also increases according to the market trend. In this way the shareholder’s wealth increases. However if company makes loss, shareholders do not get dividend and the market price of the share also decreases and in case of shutting down of company maximum loss is borne by the equity share holders.
♦ How to Invest in Equity Shares ?
There are 2 ways to invest in equity shares :
♦ Investment in Unlisted Equity Shares :
The equity shares which are not listed in any Recognized stock exchange (B.S.E / N.S.E ) are known as unlisted equity shares. On purchase / sale of such shares Securities Transaction Tax (S.T.T ) is not levied.
♦ Investment in Listed Equity Shares :
The equity shares which are listed in any Recognized stock exchange (B.S.E / N.S.E ) are known as listed equity shares. On sale or purchase of such shares the Indian government collects S.T.T at a fixed rate.
♦ Investing in Equity Shares :
When a company making profits is functioning on a small scale wants to expand its business which requires a big amount of funding but the promoters have a limited capital then the company collects such capital from public. For that they have to complete a lot of legal formalities.
When the company offers its shares to public for the first time at a fixed price, it is known as Initial Public Offer (IPO) and it is considered as Primary Market as shareholders can directly acquire the shares from the company itself and make investment. When the company allots the shares to the shareholders such shares gets listed in Stock Exchange.
Thereafter the shareholders can undertake buying / selling transactions of such listed shares on the Stock Exchange, which is known as the Secondary Market. The Securities and Exchange Board of India (SEBI) is the regulatory authority established under the SEBI Act 1992 and is the principal regulator for Stock Exchanges in India.
♦ What are the essential things required for investing in Share Market ?
It is an account where the shareholders can hold shares in his name. You can get your demat account opened through any depository participant (broker or Demat Account Company).
The data in dematerialised form is stored and maintained by 2 depositories – CDSL & NSDL.
To make investment in stock Market it is mandatory that you get a trading account opened through a stock broker registered in BSE or NSE, e.g Angel Broking, Sharekhan, Zerodha, Upstox, etc.
For making payments or receiving payments for buying / Selling shares your trading account should be linked to your bank account.
♦ How transactions takes place in Share Market ?
Shares allotted by the company after being listed on the stock exchange can be traded in the share market (Secondary market ).
In share market transactions of buying or selling of shares can be undertaken only through stock brokers eg. Angel Broking, Sharekhan, Zerodha, etc. When we place order to purchase any share to our stock broker that order is forwarded to stock exchange, where the stock exchange searches for appropriate seller, the sale transaction gets confirmed through the broker of seller at a valid price and that price is then confirmed by our broker and the shares gets reflected in our account at a fixed time. The amount is paid through our bank account and our broker issues a “Contract Note” in that the expenses incurred for the transaction are included and recovered from us.
♦ What are the expenses incurred for undertaking transactions in Share Market.
To undertake sale/purchase transactions in a Recognised Stock Exchange the following expenses needs to be incurred:
2. Securities Transaction Tax ( S.T.T)
3. Stamp Duty
4. Stock Exchange Charges
5. Depositary Participant Charges
6. SEBI Turnover Charge
7. GST, etc
♦ You need to pay Income Tax on profits that arise on sale of shares.
♦ Things to be kept in Mind :
1. First of all you have to decide whether you are a Trader or an Investor in share market !
2. If your intention is to earn profits by holding shares for a considerable or long period of time as an investment then you will be considered as an Investor.
3. While if your intention is to make profits by continuous sale / purchase transactions of equity shares by taking delivery , Intraday , derivatives ( F & O ), etc. then you will be considered as a Trader in share market.
4. Many stock broking firms at the end of the year provide you with the statement showing losses or profits incurred by you in transactions incurred in share market, on the basis of that statement determine your tax liability.
5. By doing “ Tax Planning “ before making investment you can reduce your tax liability & such planning is within four corners of the act and within objective of government.
6. Pay advance tax on profits earned during the year.
7. After completion of financial year file your income tax return before the due date.
♦ If you are an Investor.
1. Long Term capital gains ( at the rate of 10% )
2. Short Term capital gains ( at the rate of 15% )
Long Term capital gains ( at the rate of 10% )
When you invest in equity shares and sale them in a recognized stock exchange and the period of holding of your shares is more than 12 months then the arising profits/gains will be considered as long term capital gains.
Mr. Ashok invests in 100 equity shares of Wipro Limited at Rs. 300 each on 15th March, 2019 and sold the shares at Rs. 500 each on 15th February, 2021.
Here the period of holding of shares is more than 12 months hence the gain of Rs. 20,000 ( Rs 200 * 100 shares ) will be considered as a long term capital gains.
How to compute long term capital gains :
|Less :||Purchase Value||(xxx)|
|Less :||Cost of Improvement||(xxx)|
|Less :||Expenses incurred in connected with transfer||(xxx)|
|Long Term Capital Gains||xxx|
How to compute tax liability on long term capital gains :
In 2018, before the Union budget was announced, the long term capital gains on sale of equity shares or equity oriented mutual funds was totally exempted from tax. Through the Finance Bill 2018, Government introduced section 112A accordingly from F.Y 2018-19 onwards long term capital gains exceeding Rs. 100,000 will be taxable at a special rate of 10%.
Grand Fathering Clause :
In India before 01.04.2018 , long term capital gains on sale of equity shares or equity oriented mutual funds was fully exempt however after 01.04.2018 this exemption is limited to Rs 100,000.
Assuming you have invested in equity share of Reliance limited in year 1991 of Rs 100,000 and sale the same in 2017 for Rs. 50,00,000 , then till 2017-18 whole of the amount of long term capital gains of Rs 49,00,000 was exempt under the Income Tax Act, 1961.
On 01.02.2018 through budget 2018 the government imposed 10% tax on such long term capital gains exceeding Rs. 100,000. As per the said section Grandfathering clause came into force which says if shareholders has invested in equity shares or equity mutual funds before 31.01.2018 , then the market value of shares on that date ( 31.01.2018) or the actual cost of acquisition (purchase cost) which ever is higher will be considered as the purchase cost and will be deducted from sales consideration to arrive at the capital gains value. Hence with the insertion of this clause any gains till 31.01.2018 will be considered as grandfathered and thus will be exempt from tax.
♦ Things to be kept in Mind :
1. As per section 112A long term capital gains to the extent of Rs. 100,000 for a financial year is exempt.
2. If the long term capital gains exceeds Rs 100,000 then tax will be calculated on the amount of gain exceeding Rs 100,000.
3. While computing tax liability on long term capital gains you will be not be liable to get the deductions u/s 80C to 80U and rebate u/s 87 of the Income Tax Act,1961.
4. Benefit of basic exemption limit will be available.
5. To pay less tax on the gains arising out of equity shares you should hold the shares for a period of more than 12 months.
When you sale listed equity shares in 12 months ( 1 year ) or less period of time then the profits or loss arising out of such transaction will be considered as short term capital gains or short term capital loss.
The holding period of 12 months is applicable only in case of equity shares which are listed on recognised stock exchange ( B.S.E / N.S.E ).
How to compute short term capital gains :
|Less :||Purchase Value||(xxx)|
|Less :||Cost of Improvement||(xxx)|
|Short Term Capital Gains||xxx|
Mr. Nirav Kapadia invests in 500 equity shares of a listed company at Rs. 100 each on 15th April, 2021 and after 3 months sold the shares at Rs. 150 each on 15th July 2021.
|Sales Consideration (500*150)||Rs. 75,000|
|Less :||Purchase Value (500*100)||Rs. (50,000)|
|Short Term Capital Gains||25000|
As per section 111A , short term capital gains on sale of equity shares or equity oriented mutual funds through a recoginised stock exchange where STT is paid attracts tax at the rate of 15% .
♦ How can you decide whether you are doing trading business in Share Market or just Investing funds?
Since many years dispute is going on between the Income Tax department and the tax payer (assessee) regarding whether the profits or gains on sale of equity shares will be considered as Capital gains or Business profits ???
As per CBDT’s circular 6/2016 dated 29th February 2016, assessee can himself decide whether to treat the purchase of shares as investment or as stock in trade for business.
However once a stand is taken by the assessee for a particular assessment year will be applicable to subsequent assessment years, the treatment cannot be changed thereafter. That means before filing your income tax return you have to decide that whether you want to treat the sale purchase transactions undertaken by you as Investment (Capital gains/ loss) or Trading Activity (Business Income).
♦ What is more beneficial ? – Business Income or Capital Gains From the view point of Income Tax ?
1. Brokerage, Turnover charges, GST , Stamp duty , STT, etc incurred to undertake sale/purchase transactions.
2. Telephone / Internet , etc expenses incurred for business.
3. Depreciation expenses on computer and other fixed assets used in business and also repairing of the same.
4. Rent, maintenance, tax and the like expenses incurred with respect to the business premises.
5. Salary of employees
6. Consultant’s fees, newspaper fees, magazine expenses.
4. Any other office expense.
♦ Business Income :
1. Speculative Business Income:
When the transaction is settled without taking actual delivery of any commodity including stocks or shares then it will be considered as Speculative transaction , it is also called Intraday Transaction.
Speculation losses are not allowed as a set off against other business losses.
2. Income from Derivatives : Future and Options transactions
As per section 43(5) of the Income Tax Act, 1961 the profits or loss from F & O transactions are considered as business Income and not as speculative income.
3. Is maintenance of books of accounts mandatory in case of Business ?
Whether you are undertaking intraday transactions or derivative – F & O transactions or transactions with delivery in share market , you have to maintain books of accounts as per the applicable provisions of Income Tax Act, 1961.
However if your turnover is upto Rs 2 crores then as per section 44AD you can go for presumptive taxation scheme by declaring 8% or 6 % profits as the case may be and get relieved from the liability to maintain books of accounts.
4. Dividend :
Dividend is the distribution of profits by a company to the shareholders. When you invest in equity shares the company pays return on investment to all the shareholders which is known as dividend.
Till financial year 2019-20 the dividend income was exempted in the hands of shareholders as the company was liable to pay dividend distribution tax (DDT) on it. From now onward, the dividend income will be taxable at their applicable slab rates in the hands on shareholders at their applicable slab rates.
5. Can we deduct expenses from Dividend Income ?
The finance Act, 2020 provides for deduction of interest expense incurred against the dividend income, which means if you have borrowed money to invest in equity shares then in that case you will be entitled to claim a deduction of the amount of interest paid on such loan.
However such deduction shall not exceed 20% of the dividend Income.
From F.Y 2020-21 you are not entitled to claim any a deduction of any other expenditure like bank charges, bank commission , etc incurred for earning dividend.
♦ When is TDS (Tax deducted at source ) deducted from your dividend income ?
With effect from 1st April, 2020, when the dividend income exceeds Rs. 5000 in a financial year the entire amount will be subject to Tax deducted at source at the rate of 10%.
If you are having 1000 shares of BPCL and the company declares a dividend of Rs. 20 per share, then you are entitled to a dividend income of Rs. 20,000 , which is more than Rs. 5000.
On this Rs. 20,000 company will deduct TDS @ 10% i.e, Rs 2000 and deposit the remaining Rs. 18,000 to your bank account.
♦ Can we submit form 15G / 15H in case we do not want TDS to be deducted on dividend income?
Yes, when your total income during a financial year is less than the basic exemption limit, then you can submit form 15G as a shareholder to the company that you do not want TDS to be deducted on this income.
In the same way if you are a senior citizen and your estimated tax liability for a financial year is zero , then you can submit form 15H to the company and can avoid from the TDS liability.
♦ Profits or losses arising out of sale of Unlisted equity shares.
The shares which are not listed in any recognised stock exchange are called unlisted equity shares.
On purchase or sale of unlisted shares securities transaction tax (STT) is not levied.
First of all you have to decide the “period of holding” of shares.
If the period of holding is less than or equal to 24 months then the gains or losses arising out of such shares will be considered as short term capital gain or loss, however if the shares are sold after 24 months then the gain or loss will be considered as long term capital gain or loss.
♦ What will be the rate of tax?
For long term capital gains the tax rate will be 20%.
Whereas the short term capital gains will be included with your other income and tax will be calculated on the basis of applicable tax rates.
♦ Tax Planning in case of Investment in shares?
1. Instead of opening a demat account in the name of one person by opening it in the name of all adult members in a family the long term or short term capital gains can be distributed between the members of the family and by taking the benefit of basic exemption limit for each Individual, the tax liability in case of STCG @ 15% or LTCG @ 10% on one person can be decreased.
2. If the equity shares are held for a period of more than 12 months then long term capital gains to the extent of Rs 100,000 is fully exempt, whereas on the amount exceeding Rs. 100,000 tax will be collected at the rate of 10% .
For example, you have purchased certain shares for Rs. 200,000, after 12 months the the market price of the shares is Rs 300,000. So now if you sale such shares at market price, the long term capital gains of Rs 100,000 will be exempt & if you want to continue to hold these shares you can again buy these shares from Share market & Rs. 300,000 will be your new Cost of Acquisition.
3. If equity shares are held for a period of less than 12 months the short term capital gains will be taxed at the rate of 15%.
More often you incur losses on certain shares and profits on certain shares. Suppose you have incurred short term capital gains of Rs. 2,00,000 during a financial year and you also have such shares in your demat account on which you have not booked losses so by selling such loss making shares, you will incur short term capital loss, which can be set off against the short term capital gains incurred , then you can repurchase that shares. In this way you will not have to pay any tax on the short term capital gains incurred by you.
4. Take benefit of Grand fathering clause :
As you all know before the Union budget 2018, the long term capital gains on sale of equity shares was fully exempt but after 1st April, 2018 tax at the rate of 10 % was levied on such gains however one relief has been given here, that if the shares were purchased before 31.01.2018 then the market value of the shares as on 31.01.2018 can be taken as the purchase value / cost of acquisition.
Suppose you have purchased equity shares in June 2015 for Rs. 3,00,000 and the market value of such shares on 31.01.2018 was Rs 5,00,000. Now today you want to sale such shares and the maket price as on today’s date is Rs. 8,00,000.
Then the long term capital gains will be Rs. 3,00,000 (Rs 8,00,000 – Rs 5,00,000) and LTCG to the extent of Rs. 1,00,000 will be exempted and on remaining Rs. 2,00,000 you will have to pay tax @ 10%.
5. What if you incur short term or long term capital loss on sale of shares ?
The long term capital loss incurred during a financial year can be set off against long term capital gains for that financial year.
If there is a LTCG of Rs. 2,00,000 and a LTCL of Rs. 1,00,000 during a financial year then this loss can be set off against the gains and Net Rs 1,00,000 ( Rs 2,00,000 – Rs 1,00,000) will be considered as your income from capital gains.
The short term capital loss for a financial year can be set off against long term or short term capital gains of that year.
The short term or long term capital losses for a year if cannot be set off against the gains for the said year then such losses can be carried forward for 8 years and can be set off against respective gains for that years.
6. Open demat account in the name of HUF. As per the Income Tax Act, 1961 HUF is considered as a separate legal entity. The assessment of Income of HUF is done separately from its members. That means basic exemption limit of Rs. 2,50,000 is available to HUF separately.
Tax planning can also be done by forming an HUF and opening a demat account in its name.
7. With effect from 1st April, 2020 the dividend declared by a company will be taxable in the hands of shareholder.
If the investment in equity shares is done by taking loan then from dividend income only the interest paid on such loan can be taken as a deduction and that too only to the extent of 20% of dividend income.
As per section 194 the company will deduct TDS at the rate of 10% if the dividend amount exceeds Rs 5,000. This TDS can be claimed against your tax liability at the time of filing Income tax Return.
If your income is not subject to tax then as per the relevant rules you can file form 15G / 15H as the case may be so as to escape the TDS liability.
8. Benefit of Basic Exemption Limit :
Against long term capital gains or short term capital gains you will be not be liable to get the deductions u/s 80C to 80U , however you will be entitled to get the benefit of basic exemption limit .
|Age Limit||Basic Exemption limit (Rs)|
|80 years or above – for Super Senior Citizen||5,00,000|
|60 years or above – for Senior Citizen||3,00,000|
|Below 60 years ( including HUF )||2,50,000|
♦ File your Income Tax Return on Time :
As per the Income Tax Act, 1961, if your Total Income exceeds the basic exemption limit as specified above then you will have to file the Income Tax Return mandatorily.
Whereas, a partnership firm, company, LLP, Co-operative society has to mandatorily file Income Tax Return irrespective of their Income.
♦ What should you do, if you want to carry forward your loss incurred in share market to next years?
If you have incurred business loss or capital gains and you want to carry forward and set off this loss against your future income then you are required to file your income tax return before the due date.
♦ What is the due date to file Income Tax Return for F.Y 20-21?
Generally, the due date to file Income Tax Return for a Salaried Employee, Investors, Persons carrying on Business ( Not liable to Tax Audit ) is 31st July of the next financial year.
Whereas in case of a company and for all persons liable to audit under any law, the due date to file ITR will be 31st October.
Due to Covid-19, pandemic in India the due date to file Income Tax Return for the F.Y. 2020-21 has been extended as below:
|Persons||Due Date for F.Y 20-21|
|Salaried Employee, Investors ,Persons carrying on Business ( Not liable to Tax Audit )||31st December ,2021|
|Company and for all persons liable to audit under any law ( Societies, Trusts, assesses liable to Tax Audit )||15th February ,2022|