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Taxation on equities and FAQ's

What is previous year and assessment year?

The year for which income is taxed is called the previous year. Year constitutes a period starting 1st April of a particular year and ending 31st March the next year. Example April 1, 2013 to March 31, 2014 would constitute a previous year. Income earned during this period will be subject to tax in the subsequent year i.e. 2014-15, which is called the assessment year

What is the nature of income under which transaction in securities will be taxed?

In case securities are held as an investment, they are liable to be taxed under "Capital Gains", once the securities are sold. Sale of securities can be further classified as long term and short term; detailed later in this note.
In case these securities are held as stock-in-trade i.e. if you are in the business of buying and selling securities, the profit and loss from purchase and sale of securities will be taxed under the head "Profits or business gains/ professional gains"

What is a capital asset? 

Capital Asset means all movable or immovable property except trading goods, personal effects, agricultural land other than within municipal limits and gold bonds. Jewellery and ornament are not personal effects and their sale will attract capital gains.
With effect from A.Y 2015-16, capital asset also includes any security held by a Foreign Institutional Investor in accordance with the SEBI regulations

What is a short term/ long term asset? 

Capital assets are classified as Long Term or Short Term with reference to the period of holding of the assets until it is transferred.
You can view the classification
HERE

The period of holding for the above purpose could be different from the actual period of holding in certain situations: 
- In case the shares or securities are held in a company which is under liquidation, the period subsequent to the date on which the company goes into liquidation shall be excluded
- In case the shares or securities have been acquired as gift or under will, the period of holding shall include the period for which the asset was held by the previous owner
- In case the shares or securities are held in an amalgamating company, the period of holding will include the period for which the shares have been held by the assesse in the amalgamating company
- In case of shares subscribed to by the person to whom such a rights issue is offered or who has acquired the right from another person, the period of holding of the shares for the first person shall be reckoned from the date of allotment of such shares
- In case a person has renounced his right to subscribe to certain shares in favour of another person, then the period of holding of such rights for the first person shall be reckoned from the date of offer of such right by the company or institution

What is the cost of acquisition of shares? 

Generally, cost of acquisition is the cost incurred to purchase shares. However, in special cases cost of acquition is arrived at based on the following illustration
View illustration
HERE

Can brokerage/any other expenditure paid on purchase and sale of shares be deducted for calculation of short- term capitals loss/gain? 

In the case of shares held as Investment:
"Purchase: Brokerage, STT and any other expenditure paid on purchase of short- term asset can be added to the cost of acquisition
Sale: Brokerage/ any other expenditure paid on the sale of a short- term asset will be deducted from the sale consideration [except STT]

In the event of shares held as Stock-in-trade:
STT can be availed as a business expenditure in respect of purchase and sale

What is capital gain/loss? 

Any profit or gain arising from the sale or transfer of a Capital Asset is liable to be taxed under the head 'Capital Gains'. The income under this head has to be declared in the year in which the transfer(sale) takes place.
Capital gains are taxed on accrual basis, whether the consideration is received or not, in the case of gains from the sale of shares and securities

How to compute short term capital gains? 

Short term capital gains are calculated as the difference between (sale price - purchase cost including any expenses incurred for acquiring these shares). It will be included in the computation of tax along with other heads of income under the head "Capital gains" 
Based on your total taxable income, tax rate will be applied on these gains. However if the transaction has suffered STT (Security Transaction Tax) it will be taxed as per sec 111A of the Income Tax Act, 1961

How to compute long term capital gains (LTCG) on shares? 

LTCG on sale of shares is exempt from income tax, if shares were sold on a recognized stock exchange.
However, if the shares were not sold on recognized stock exchange, it should be computed as follows:- 
Full value of sale consideration  XXX
Less: Indexed Cost / Cost of Purchase  XX
Less: Cost of Transfer  XX
Long Term Capital Gain  XX

What is indexed cost of acquisition of shares? 

In case of LTCG, the cost of acquisition can be indexed for inflation factor, thereby adjusting the shares purchased for rise in prices. 
The cost of acquisition can be indexed for the inflation factor as shown below: 
Cost of acquisition * cost inflation index of the year in which shares where sold ÷ Cost of inflation index of the year of acquisition

(Or) 

Year beginning on 01/04/2013, whichever is later. 
However, indexation benefit is not applicable in case of bonds and debentures 

Do I have to compulsorily take benefit of indexation? 

In case of shares, for the purpose of computation of long term capital gains, you have an option to pay tax @10% (plus applicable surcharge + education cess) without indexation or 20% (plus applicable surcharge and education cess) with indexation. Hence, it is not necessary for you to take benefit of indexation, rather you can opt for the alternate method to compute long term capital gains, if it is beneficial.
However, the indexation benefit is not applicable in case of bonds and debentures 

What is a speculative transaction? 

Speculative transaction is a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled without the actual delivery or transfer of the commodity or scrip's. 
Since these transactions do not result in delivery, they are treated as speculative transactions. Therefore, profits and losses from such transactions would be considered as profits and gains from Speculation Business 
However, if margin transactions are undertaken as a hedge to guard against losses in holdings, they would not be considered as speculative. Therefore, profits and losses from such transactions would be considered as non-speculative business income/ loss. 

What are the implications if a transaction is treated as a speculative transaction? 

Profits from speculative transactions would be treated as income from speculation business under the head Profits and Gains from Business/Profession. Profits, if any, from speculation are liable to be taxed at the normal rate applicable to other non-speculative business income 
However, losses computed in respect of a speculative business carried out by the assesse shall not be set off; except against profits and gains, if any, in another speculation business 

What are the current tax rates for Short term and Long term Capital gains?

  1. Short term capital gains u/s 111A - 15%
  2. Other Short term capital gains - Regular income tax slab (refer the link below)
    TAX-SLABS
  3. Long term capital gains u/s 10(38) - Exempted
  4. Other Long term capital gains - 20%
  5. Long term capital gains in case of unlisted shares:-

- If indexation benefit is availed - 20%
- If indexation benefit is not availed - 10%