Bombay Chartered Accountants’ Society

Concessional Tax Treatment for Capital Gains on Shares and

SecuritiesPresentation by:

Yogesh Thar

An Overview

*Equity Shares*Derivatives*Units of EOF

Others

Transactions in Shares & Securities

Others*In RSE*Repurchase By MF

Capital Gains

•STT Applies•LTCG exempt•STCG @ 10%•STT not deductible

Business

*STT Applies*Business Income @ normal Rates *STT eligible for rebate

*STT – NA*LTCG –S.112 etc.*STCG-Normal Rates*If Business-normal provisions

STT - An overview

• S.96: STT applies to “Taxable Securities Transactions” (TST) entered into on or after notified date

• S.97: Definitions• S.98: Charging Section• S.99: Value of TST

STT - An overview (contd)

• S. 100: Collection and recovery of STT• S. 101 to 113: Procedures, interest, penalty,

appeals etc.• S. 114: Power to make rules

Notified Date

• STT applies to TST entered into on or after October 1, 2005 [IT Not. No. 247 dated Sept 28, 2004]

• In case of sales, earlier acquisitions also covered

• Modes of earlier acquisition also not relevant. E.g. Bonus, conversion of FCDs, allotment, purchase from market etc. all covered

Taxable Securities Transactions

• S. 97(13) defines TST• “means” - exhaustive definition• Purchase or sale (entered into in a RSE) of:

– Equity Share in a company– Derivative– Unit of EOF

• Sale of units of EOF to the Mutual Fund

TST (contd)

• Items not covered:– Preference Shares– Debentures– Bonds

• Transactions not covered– Buy back– Open offer– sale of right entitlements– negotiated deals

Charge of STT

• S. 98 - charging section - Table• Rates to be applied to Value of TST (S.99) • Equity Share Transactions in a RSE

– With Delivery • Purchaser - 0.075% • Seller - 0.075%

– Without Delivery• Seller - 0.015%

Charge of STT (contd)

• Derivative transaction in a RSE– Seller - 0.01%

• Sale of unit of EOF to the MF– Seller - 0.15%

Value of TST (S. 99)

• Derivatives– Option

• VTST = Strike Price + Option Premium– Futures

• VTST = Price at which futures is traded

• Equity Shares and units of EOF– VTST = Price at which purchased or sold

Collection and Recovery

• RSE to collect• MF to collect - Trustees or their authorised

person responsible• To pay to the CG by 7th of the next

calendar month• To pay even if SE / MF fails to collect

STT Rules

• Determination of Value of TST - Rule 3• Netted Settlement Mode

– Purchase during a day is set off against sales and actual delivery is of net quantity

• Trade-for-trade Settlement Mode– Each trade is settled by actual delivery

• Auction Settlement Mode– Auction initiated by SE

STT Rules (contd)Netted Settlement Mode

S c r i p T r a d e Q n t y P r i c e V a l u eAAA

P u r - 1P u r - 2S a l - 1

T o t a l :

1 0 02 0 01 5 04 5 0

5 05 15 2

5 0 0 01 0 2 0 0

7 8 0 02 3 0 0 0

V o l u m e W e i g h t e d A v e r a g e P r i c e = 2 3 0 0 0 / 4 5 0 = 5 1 . 1 1

STT Rules (contd)

• Trade-for-Trade– Price at which Equity Shares / Units are

purchased or sold• Auction Settlement Mode

– Purchase : Volume Weighted Average Price– Sale: Price at which Equity Share / Units are

sold

LTCG - Exemption [S. 10(38)]

• LTCG on Equity Shares or Units of EOF only eligible

• Not applicable to Pref. Shares, Debentures etc.

• LTCG arise on “sale”• Transaction of sale is entered into on or

after the notified date (Oct 1, 2004)• Transaction is chargeable to STT

LTCG - Exemption (contd)

• Salient Features:– Exemption applies to all assessees (Resi, NR,

FIIs etc)– Securities held as Stock in Trade - not eligible– Applies to thinly traded or regularly traded -

scope wider than se. 10(36)

STCG - Reduced Rates [S. 111A]

• STCG on Equity Shares or Units of EOF only eligible

• Not applicable to Pref. Shares, Debentures etc.

• STCG arise on “sale”• Transaction of sale is entered into on or

after the notified date (Oct 1, 2004)• Transaction is chargeable to STT

STCG - Reduced Rates (contd)

• Tax payable on total income:– On such STCG :@ 10% – On remaining TI :as if it is the TI– On the aggregate tax as above, add surcharge

and education cess.• In cases of resident individuals and HUFs:

– No tax if TI is below Rs. 50,000– Relief from STCG tax if remaining TI < Rs.

50,000

Illustration of relief

Case1 Case21 Total income of

individual1,60,000 60,000

2 STCG on ES / EOF 20,000 20,0003 Other Income 1,40,000 40,0004 Amt on which STCG

payable20,000 10,000

5 Tax on STCG 2,000 1,000

STCG- S.111A (contd)

• Deduction under chapter VIA not available on STCG eligible u/s. 111A

• Rebate u/s. 88 not allowed against STCG tax levied u/s. 111A

Rebate u/s. 88E

• Applies only in cases where income from TST is chargeable as “business income”

• Applies to all assessees, individual, companies, firms etc., whether residents or non-residents

• Amount of STT paid is allowed as a deduction from income tax on TST

Rebate u/s. 88E (contd)

• Evidence of payment of STT to be furnished along with ROI:– Form 10DB for transactions in a RSE; and– Form 10DC for sale of units of EOF to the MF– Above Forms notified on Jan 6, 2005– The Forms have to be verified by the assessee

• Rebate not to exceed the amount of tax on income from TST

Rebate u/s. 88E (contd)

• Illustration:– Business income from TST :20,000– Other business income :40,000– Income from other sources :10,000– Total Income :70,000– Tax on Total Income(w/o SC/ED): 3,000– STT paid on 20,000(VTST:20 lacs):1,500

Rebate u/s. 88E (contd)

– Average rate if Income tax(3,000 / 70,000 x 100) [S. 2(10)] :4.29%– Income tax on Business income from TST at average rate(20,000 x 4.29%) :858– Rebate restricted to :858

Interesting Issues

• Capital Gains v. Business Income• Conversion of stock-in-trade to capital asset• Deduction for expenses - effect of S 14A• S. 88E - allocation of expenses• Losses under the head Capital Gains• Effect on applicability of S. 94(7)

Thank You