Equity Investments: Tax Impact

``Equity and efficiency are complimentary, not contradictory…`` – Dr. Manmohan Singh

Equity investments can be in the form of direct investments through equity shares or indirectly through mutual funds. Balanced funds with equity exposure above 65% in Indian companies traded on a stock exchange are treated as equity from a taxation standpoint.

Dividend Distributed

Apart from capital appreciation, one can also earn returns by means of dividend declared by the company/fund. These dividends are tax-free in the hands of the investor, and there is no dividend distribution tax either on ``Equity`` mutual funds as per the definition above. This is so because when companies declare dividends, there is a dividend distribution tax that is paid by the company. This has no impact on the investor.

Securities Transaction Tax (STT)

The point which is often ignored is STT that is applicable on purchase/sale of equity shares, units of equity oriented mutual fund (delivery based) at 0.125%. For non-delivery based sale, 0.025% is applicable on transactions, sale of derivatives/options would attract 0.017% STT. Hence, they do not escape from the ambit of taxes irrespective of the holding period.

Computing Date of Holding – Special Scenarios

Shares acquired as a gift

Where one has been gifted equity, the period for which the shares were held by the previous owner (the person who gave the gift) is to be included in the holding period. The cost of the shares incurred by the donor of the gift is considered to be cost of benefactor of gift.

Shares acquired as inheritance

Where one has inherited equity, then the period for such shares will be from the date of transfer (to the one who has inherited the equity). The purchase cost will be the Fair Market Value (FMV) as on the Date of Transfer.

Rights shares

For right shares, the period of holding will be computed from the date of allotment of the shares. The amount actually paid for purchase of the rights shares is taken as cost of the shares.

Bonus shares

When one receives bonus shares, the period of holding is computed from the date of allotment of the bonus shares. Cost of bonus shares is taken as nil.

Shares listed Overseas

Shares listed overseas and mutual funds investing in overseas stock (with Indian traded equity shares composition <>65%

Capital Losses

Since long-term capital gains earned on equity investments are tax-free, long-term capital losses incurred on equity investment cannot be set off to reduce taxable capital gains.

Short-term capital losses incurred on equity investment can be set off against any capital gain (long-term or short-term). If in the current year there is no taxable capital gain to set off the loss against, one can carry forward this loss for 8 years and set it off against future taxable capital gains.

Plan well- you can now reduce the taxes on your capital gains from equities.

Sourced From - www.myiris.com