Tax Implications- Investment in Shares

Dividend income

  • Dividend received by investors is exempt from tax – section 10(34) of IT Act
  • However, Company distributing dividends is liable to dividend distribution tax @ 16.995%*( Sec 115 O of IT Act, 1961)

Profit from sale/ transfer of Shares

  • If considered as capital gains ( Capital Gains is calculated as total sale consideration as reduced by cost of acquisition and expenses incurred in connection with such transfer)

     

    Capital Gains
    Long-term Capital Gains
    Period of holding Rate*
    Short-term Capital Gains
    Period of holding Rate*
    Listed Shares (where STT paid
    More than 12 months Exempt us 10(38)
    12 months or less 16.995% *(Sec 111A)
    Unlisted Shares or in cases where STT is not paid or buy back of shares by the Company or sale in open offer
    More than 12 months 22.66% (with indexation benefit)@
    12 months or less Included in regular income
  • If Gains on transfer of shares is considered as business income – net income is included in regular income. In computation of business income, Securities Transaction Tax (‘STT’) is allowed as an expense. Management fees / carried interest may constitute an allowable expense.

    • *The rates are after including surcharge @ 10% and cess @ 3%, which may differ depending on the type of the investor and its total income.
    • @Alternatively a concessional tax rate of 11.33% is applicable for capital gains purpose provided securities are listed securities and have not been subjected to STT. (eg. Buyback of securities) Indexation benefits would not be allowed in such case.

Tax Implications- Investment in Debentures

Interest income

Interest received by investors is included in regular income

Premium received, if any, on redemption of debentures can be considered as interest income.

Profit from sale/ transfer of Debentures

  • If considered as capital gains (Capital Gains is calculated as total sale consideration as reduced by cost of acquisition and expenses incurred in connection with such transfer)

     

    Capital Gains
    Long-term Capital Gains
    Period of holding Rate*
    Short-term Capital Gains
    Period of holding Rate*
    Listed Debentures
    11.33% Exempt us 10(38)
    Included in regular income 16.995% *(Sec 111A)
    Unlisted Debentures
    More than 12 months 22.66%@
    36 months or less Included in regular income
  • If Gains on transfer of shares is considered as business income – net income is included in regular income. Management fees / carried interest may constitute an allowable expense.
  • *The rates are after including surcharge @ 10% and cess @ 3%, which may differ depending on the type of the investor and its total income.
  • @In case of listed debentures, it is possible to take a view that concessional tax rate of 11.33% (without indexation) per proviso to section 112 should be available [reliance could be placed on the decision of Authority for Advance Rulings in case of McLeod Russel India Ltd (299 ITR 79) & Timken France Sas (212 CTR 349) and Mumbai Tribunal in Alcan Inc. vs DDIT (16 SOT 8)]. However, tax authorities may seek to apply normal tax rate @ 22.66% relying on Mumbai Tribunal’s decision in BASF Aktiengesellschaft vs DDIT (293 ITR 1).
  • ^According to the third proviso to section 48 of the Income Tax Act, indexation benefit is not available to debentures.

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