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Friday, December 7, 2012

About taxation of Capital Gain/loss on equity shares, MFs and F&O transactions – a guest post

Many small investors enter the stock market without adequate preparation. Some resort to F&O trading in the hope of making quick gains. The consequences are often disastrous. Not only should one learn about how the stock market works and how to choose stocks/funds for trading or investment, one needs to know about the tax implications of various transactions.

In a guest post, Aashish explains the tax implications of profits and losses made in the stock market. If you find the post useful and/or have any questions, please leave a comment using the ‘comments’ link below the post. 

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Profits earned on sale of equity shares and equity-oriented MFs (65% or more of portfolio consisting of equity shares) are taxable as capital gains. Capital gains can be ‘long-term’ or ‘short-term’ depending on the period for which the equity shares/MFs are held.

Equity shares/MFs held for one year or longer are treated as ‘long-term’ for capital gains purposes. Any profit on sale of such shares/MFs is completely exempt from capital gains tax u/s 10(38) of the IT act - provided the transaction is processed through a stock exchange and Securities Transaction tax (STT) is paid. Any long-term capital loss has to be absorbed by the tax payer as such a loss cannot be set-off against a long-term capital gain, which is tax free.

If equity shares/MFs are held for less than one year, they are treated as ‘short-term’ for capital gains purposes. Any profit on sale of such shares/MFs is subject to capital gains tax @15% (+3% cess) u/s 111A of the IT act – provided STT is paid for the transaction. Any short-term capital losses can be set-off against short-term capital gains before calculating short-term capital gains tax.

In case STT is not paid – such as for a private transaction between two parties, or a share buyback by a company directly from its shareholders, or in the case of unlisted privately-held shares and non-equity oriented MFs (less than 65% of portfolio consisting of equity shares), capital gains tax on profit is computed differently.

Any profit earned on sale of such shares/MFs is taxed at normal capital gains tax rates. For short-term capital gains, the tax rate is as per tax payer’s individual tax slab (+3% cess). For long-term capital gains, 2 options for taxation u/s 112 of the IT act (whichever is lower) are available to the tax payer:

Either, the cost of acquisition of shares can be indexed according to the Cost Inflation Index published each year by the tax authorities; tax is assessed @20% (+3% cess) after taking into account the profit based on the indexed cost of acquisition; Or, tax is assessed @10% (+3% cess) without taking into account any cost indexation of such shares.

Futures & Options transactions are not delivery-based. There is no physical delivery of any capital asset. There is no question of any short-term or long-term capital gain or loss as F&O contracts are not treated as capital assets. Any gain or loss on such transactions is considered as regular business gain and loss.

Therefore, F&O profits are taxed as business profits as per tax payer’s individual tax slab (+3% cess). Any F&O losses are treated as business losses and can be set off against any other source of income (other than salary).

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(Aashish Ramchand is passionate about Indian taxation advisory and loves to write about the Indian tax system and its various nuances. A Chartered Accountant by profession, he is the Co-founder of Make My Returns.)

2 comments:

aptbot said...

Hi Ashish,

I have incurred loss of around 50k in F&O transactions, and a gain of 10K in equities for this financial year.
As I understand you correctly, these F&O losses can't be be deducted from taxable salary. But these can be deducted from other income. So what are these other income ? equity gains, FD interest gain ?

Thanks in advance.

Aashish JR said...

Hi Aptbot,

Thanks for your query.

Since F&O Losses are treated as regular business losses. Regular business losses can be set off against any gain except for salary. Therefore capital gains, other sources, house property income and even speculation gains can be used to set off regular business losses(F&O losses)

Hope this helps