TAXATION OF SHARES / SECURITIES

Introduction:

Shares / securities / Units of Mutual fund / Business trust all are capital assets as per definition of Capital Assets.

Taxing the Profit from shares are always debateable issue, however CBDT issue circular No. 06/2016 dated 29/02/2016 wherein it provides option to taxpayer that to tax profit as Business Income or Capital Gain. This circular applicable for profit from listed shares only and option once exercised assesse will not allow to change his/her stand again.

Taxation of Shares and Securities

If Assessee exercises option to Show profit as Business Income:

If assesse exercises the option to shows profit as Business Income then the Income from Profit was taxed under the head Income from Business or Profession. Tax at normal rate of tax i.e slab rate.

If assesse exercises option to Show profit as Capital Gain:

Listed Securities (other than units of MF) on recognised stock Exchange in India Unit of UTI or Equity oriented Mutual Funds Zero Coupon Bonds Held for the period upto 12 months preceding date of transfer Short Term Capital Assets (STCA)
Held for the period more than 12 months preceding date of transfer Long Term Capital Assets (LTCA)
Unlisted Shares / Immovable Assets Held for the period upto 24 months preceding date of transfer Short Term Capital Assets (STCA)
Held for the period more than 24 months preceding date of transfer Long Term Capital Assets (LTCA)
Other Capital Assets (Units of Mutual Funds, Debentures, Goodwill, Trademark etc.) Held for the period upto 36 months preceding date of transfer Short Term Capital Assets (STCA)
Held for the period more than 36 months preceding date of transfer Long Term Capital Assets (LTCA)

Cost of Acquisition: 

Type of Capital Assets Cost of Acquisition Section 2(42A) Period of holding
Shares purchased from company Amount actually paid to the company Date of allotment by company to date of transfer
Shares purchased from Broker / Market Amount actually paid to broker including brokerage Date of broker note to date of transfer
Shares purchased from other person Amount actually paid Date of contract of purchase to date of transfer
Offer of right shares not subscribed but renounced NIL Date of offer To Date of Renouncement
Person purchasing renounced offer Amount paid to Seller of right and Company Date of allotment of right shares To Date of Transfer
Bonus Shares/Other Asset allotted free of cost NIL

FMV on 01.04.2001 available if such assets acquired upto 31.03.2001

Date of allotment of bonus shares To Date of transfer
Other Capital Assets Cost of Acquisition

FMV on 1.4.2001 available if such assets acquired upto 31.3.2001

Date of Acquisition

To

Date of Transfer

Period of Holding & Cost of acquisition of Securities should be calculated on FIFO basis. [Section 45(2A].

Indexation benefit is not available to shares, bonds (other than capital indexed bonds of Government & gold sovereign bonds) and debentures.

Cost of acquisition, if Section 112A is applicable:

In relation to a long-term capital asset, being an equity share in a company or a unit of an equity oriented fund or a unit of a business trust referred to in section 112A, acquired before the 1st day of February, 2018 shall be higher of:

(i) the cost of acquisition of such asset; and

(ii) lower of:

a. the fair market value of such asset; and

b. the full value of consideration received or accruing as a result of the transfer of the capital asset.

“fair market value” means,:

1) in a case where capital asset is listed on any recognised stock exchange as on 31st day of January, 2018, highest price of the capital asset quoted on such exchange on the said date:

Provided that where there is no trading in such asset on such exchange on the 31st day of January, 2018, the highest price of such asset on such exchange on a date immediately preceding the 31st day of January, 2018 when such asset was traded on such exchange shall be the fair market value;

2) in a case where the capital asset is a unit which is not listed on a recognised stock exchange as on the 31st day of January, 2018, the net asset value of such unit as on the said date;

3) in a case where the capital asset is an equity share in a company which is—

(A) not listed on a recognised stock exchange as on the 31st day of January, 2018 but listed on such exchange on the date of transfer;

(B) listed on a recognised stock exchange on the date of transfer and which became the property of the assessee in consideration of share which is not listed on such exchange as on the 31st day of January, 2018 by way of transaction not regarded as transfer u/s 47,

An amount which bears to the cost of acquisition the same proportion as CII for the financial year 2017-18 bears to the CII for the first year in which the asset was held by the assessee or for the year beginning on the first day of April, 2001, whichever is later

Rate of Tax on Capital Gain:

> Tax on STCG is charged @ 15% (plus surcharge and cess as applicable) if STCG covered u/s 111A i.e. STCG arising on transfer of equity shares or units of EOMF through recognised stock exchange in India and transaction subject to STT.

> Tax on LTCG is charges @ 10% (plus surcharge and cess as applicable)

√ LTCG arising from sale of listed securities and it exceed Rs.1,00,000/- [Section 112A].

√  LTCG arising on transfer of Any securities listed in recognised stock exchange in India, Any units of UTI or MF (whether listed or not) and Zero Coupon Bond.

Section 10(38): Income Exempt from transfer of certain capital assets:

Upto AY 2017-18

Capital Asset being Equity shares in company or units of equity oriented fund or unit of business trust sold through recognized stock exchange & transaction subjected to security transaction tax. Then Long Term Capital Gains shall be Exempt.

For AY 2018-19

Capital Asset being Equity shares in company or units of equity oriented fund or unit of business trust sold through recognized stock exchange & transaction subjected to security transaction tax. Then Long Term Capital Gains shall be Exempt.

Exemption u/s Section 10(38) shall not apply on transfer of equity share in a company, if the transaction of acquisition, other than the acquisition notified by Central Government in this behalf, of such equity share is entered into on or after the 1st day of October, 2004 and such transaction is not chargeable to securities transaction tax.

W.E.F. AY 2019-20

Exemption u/s Section 10(38) shall not apply to any income arising from the transfer of long-term capital asset, being an equity share in a company or unit of equity oriented fund or unit of business trust, made on or after the 1st day of April, 2018.

Capital Gain on purchase by company of its own shares / specified securities (BUY BACK) [Section 46A]

> Where a shareholder or holder of specified securities,

> Received any consideration from company for purchase of its own shares or specified securities,

> Shall be chargeable to Capital Gain in year in which shares /securities are purchased by company.

Special Points:

a) Period of Holding : Date of acquisition of Shares/Securities to Date of buy back by company

b) Full value of Consideration : Amount Received from the company

c) Buy Back of unlisted shares is exempt in hands of shareholder u/s 10(34A) if TAX paid by Domestic company u/s 115QA.

Author Bio

Qualification: CA in Practice
Company: CA AMAR GIRISHKUMAR OZA
Location: JAMNAGAR, Gujarat, IN
Member Since: 31 Jul 2020 | Total Posts: 4

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7 Comments

  1. CMA ANIL SHARMA says:

    Good write up. What is the position if speculation or Day trading is treated as Business Income and how Audit provisions will be applicable? Or how to determine turnover for day trading or speculative transactions of securities or shares

    1. oza4ever says:

      As per Para 5 of “Guidance Note on Tax Audit under Section 44AB of the Income Tax Act,1961” issued by The Institute of Chartered Accountants of India (ICAI),” For Intra day trading, if treated as Business, then total of Net Profit / Loss is treated as turnover. For Example Profit of 80 lacs & loss of 25 lacs, then turnover is 105 lacs. Negative also treated as positive to determine turnover . After determining turnover, applicability of audit as per section 44AB will be done.

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