The Tax Implications– Securities may arise in two modes i.e. through investment in shares and investment in debentures.

Tax Implications- Investment in Shares

  • Dividend income
    • Dividends are taxable in the hands of shareholders at the income tax rate applicable in case of recipient taxpayer. Also, shareholder shall be entitled to a deduction on account of interest expense up to 20% of the dividend Thus, domestic companies are not required to pay any DDT.
    • Also, the dividend is taxable on receipt basis, advance tax calculation is also required to be done on actual receipt basis. Proposed dividend to be ignored.

 

    • 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

    1) Listed Shares (where STT paid

    More than 12 months Exempt but up to Rs. 1 lakhs only. After Rs. 1 Lakhs, capital gains are taxed @ 10 % without indexation u/s 112A
    12 months or less 15% *(Sec 111A)

    2) where STT is not paid

    More than 12 months 20% (with indexation benefit) @
    12 months or less Included in regular income

    3) Unlisted Shares

    More than 24 months- 20% (with Indexation)
    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.
  • Gains/Losses earned using the intraday is taxed under the speculative business under the head PGBP. However, the gains arising from the IPO (Initial Public Offer) is to be treated as short term capital gains even if it is sold on the listing day itself.

 

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

More than 12 months 10 % without indexation under section 112
12 months or less Included in Regular Income

Unlisted Debentures

More than 36 months 20 %@ without indexation
36 months or less Included in regular income
  • If Gains on transfer of debentures is considered as business income– net income is included in regular income. Management fees / carried interest may constitute an allowable expense.

^According to the third proviso to section 48 of the Income Tax Act, indexation benefit is not available to debentures.

You can further read about Tax Implications- Mutual Funds: Visit Tax Implication- Mutual Funds