Etica Wealth Management - Taxation on Indian Financial Products

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Indian Income Tax Slabs, Capital Gains
Taxation System in India
Total Income and Types of Assessee
Taxable Income Slab for FY 2011 - 12
Capital Gains Taxation
Intra-day Trading
Taxation on Derivatives
Dividend Distribution Tax (DDT)
Securities Transaction Tax (STT)
Tax Deducted at Source (TDS)
Surcharge and Education Cess
Mutual Fund Taxation
Direct Equity Trading Taxation

Debentures Taxation
PMS Taxation
Private Equity Taxation
Gold Taxation
Real Estate Taxation
Insurance Taxation
Section 80 C Investments
Other Small Savings Taxation
Wealth tax
Sec 80 D - Health Insurance Premium
DTC - Proposed Changes

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Etica Wealth Management - Taxation on Indian Financial Products

  1. 1. 18-02-2012All about taxation on Indian Financial Products for FY 2011 - 12ÉTICA WEALTH MANAGEMENT PVT LTD April 2011INDEX Taxation System in India Debentures Taxation Total Income and Types of Assessee PMS Taxation Taxable Income Slab for FY 2011 - 12 Private Equity Taxation Capital Gains Taxation Gold Taxation Intra-day Trading Real Estate Taxation Taxation on Derivatives Insurance Taxation Dividend Distribution Tax (DDT) Section 80 C Investments Securities Transaction Tax (STT) Other Small Savings Taxation Tax Deducted at Source (TDS) Wealth tax Surcharge and Education Cess Sec 80 D - Health Insurance Mutual Fund Taxation Premium Direct Equity Trading Taxation DTC - Proposed Changes 1
  2. 2. 18-02-2012TAXATION SYSTEM IN INDIAIndia has a well-developed tax structure with clearly demarcated authority between Central and State Governments and local bodies. Direct Taxes Capital Gains Tax Tax on Corporate Income Personal Income Tax Tax Incentives Double Taxation Avoidance Treaty Wealth Tax Taxes Indirect Taxes Levied Excise Duty Service Tax Custom Duty Securities Transaction Tax Taxes Levied by State Governments and Local Bodies Sales Tax / VAT Other TaxesTOTAL INCOME AND TYPES OF ASSESSEE GROSS TOTAL INCOME: As per the Income Tax Act Income is Chargeable to tax under five heads, those being: 1) Salaries 2) Income from House Property 3) Profits and Gains from Business or Profession 4) Capital Gains. 5) Income from Other Sources PERSON / TYPES OF ASSESSEE: 1) An Individual. e.g. Mr. A or Mr. B. 2) A Hindu Undivided Family. e.g. Mr. A (HUF) 3) A Company. e.g. XYZ Pvt. Ltd. Or ABC Ltd. 4) A Partnership firm. e.g. M/s ABC or M/s XYZ and Co. 5) An Association of Persons or a Body of Individuals, whether incorporated or not. e.g. ABC Sangh or XYZ Dal. 6) A Local Authority. e.g. Pune Municipal Corporation or PCMC Municipal Corporation. 7) Every Artificial Juridical persons not falling within any of the above categories. (Residual Category). 2
  3. 3. 18-02-2012TAXABLE INCOME SLAB FOR INDIVIDUALS FOR FY 11-12 Assessee Total Income Tax rate Women Rs. 0 - 1,90,000 Nil Rs. 1,90,001 - 5,00,000 10% Rs. 5,00,001 - 8,00,000 20% Rs. 8,00,001 or more 30% Senior Citizen Rs. 0 - 2,50,000 Nil (60 years and above) Rs. 2,50,001- 5,00,000 10% Rs. 5,00,001 - 8,00,000 20% Rs. 8,00,000 or more 30% Others (Men / HUF etc) Rs. 0 - 1,80,000 Nil Rs. 1,80,001 - 5,00,000 10% Rs. 5,00,001 - 8,00,000 20% Rs. 8,00,000 or more 30% Very Senior Citizen Rs. 0 - 5,00,000 Nil (80 years and above) Rs. 5,00,001 - 8,00,000 20% Rs. 8,00,000 or more 30% Surcharge is not applicable Education cess is applicable @ 3 percent on income-taxCAPITAL GAINSA Capital Gain can be defined as an any income generated by selling a capital investment . The gain here is the differencebetween the price originally paid for the investment and money received upon selling it, and is taxable. Nature of Asset (Capital Investment) Short term capital assets Long term capital assets Listed & Unlisted Shares, Securities (like Held less than 12months Held more than 12months Debentures, Govt. securities) listed on a recognized stock exchange in India, Mutual Funds and Gold ETF Assets other than mentioned above i.e. sale of Held less than 36 months Held more than 36 months property / Unlisted Debentures Type of Gain Tax rate in case of transfer of Tax rate in case of transfer of assets subject to payment of other assets STT Long-term capital gains Long- NIL 22.145 % with indexation Short-term capital gains Short- 16.995 % Progressive slab Rates applicable to individualsLosses under the head “Capital Gains” cannot be set off against income under other heads of income whether salary, Business &profession, House Property or Income from other source.Short-term capital loss can be set off against Short-term capital gain & long term capital gains. Long-term capital loss can be set off onlyagainst Long-term capital gain. If Long-term and short-term capital losses cannot be set off against the capital gain of that particular yearthen it can be carried forward for the next 8 consecutive years.Loss from speculative business can be set off only against income from speculative business. In these cases, the net loss can be carriedforward for setoff against the profits and gains only from the respective business and the carry forward is allowed for only 4 years and not8 years. 3
  4. 4. 18-02-2012INTRADAY TRADING Profit from intraday trading Business Income STCG Tax Rate: 15% Speculative Non – Speculative Business Income i.e. Derivatives (F&O) i.e. Intraday Trading Tax Rate: As per Tax Slab Tax Rate: As per Tax SlabProfit/Loss from Dealing in Shares (Intraday, contract settled without actual delivery of shares) is Speculation Profit/LossProfit or loss from dealing in shares where contract settled otherwise than the actual delivery (Intraday) is speculation profit/loss. However if it is forhedging the existing position then it is not the speculation.Profit/loss from Intra day day trading can be taxed either• Short term capital gain tax or• Speculative business incomeTreatment of these type of transaction is depended on intention of the assesses ,quantum of transaction , frequency of transaction etcShort term capital gain.Suppose if any individual’s intraday transaction is1-2 times in a week/month and that is also within his net worth value he can treat that income loss asshort term capital gain.Speculative Business IncomeIncase if he purchases in lots heavier than his net worth / volume of transaction is heavy then it can also be treated as speculative short sellingTAXATION ON DERIVATIVESStocks & Index FuturesProfit or Loss from Trading in Derivatives (Stocks & Index) is treated as business profit or loss, not speculation even though there is no delivery.actual delivery.As per proviso (d) of section 43(5) profit or loss from a derivative transaction is treated as business profit or loss if following conditions aresatisfied:a) It is carried out in a recognized stock exchange (as per section 2(f) of securities contract regulation Act 1956) and;b) It is carried out electronically on screen-based systems through a stock broker or sub-broker or such other intermediary;c) It is supported by the time stamped contract note issued by a broker, sub-broker or other intermediaryd) It is carried out in a notified stock exchange by the central government for this purpose (NSE & BSE is notified exchange)Currency FuturesProfit or loss from trading in currency future is business income/lossProfit or loss from trading in currency future is treated as business profit or loss if it satisfies the conditions (a) to (d) as discussed above.For the currency future NSE, BSE & MCX stock exchange ltd is the notified stock exchange.Commodity FuturesProfit or loss from Commodity future is speculation profit/lossProfit or loss from trading in commodity future is treated as speculation profit or loss because it is not covered in the exceptions of thesection 43(5). Exceptions of section 43(5) covers only derivatives referred to in clause [(ac)] of section 2 of the Securities Contracts(Regulation) Act, 1956 (42 of 1956) while commodity future is regulated by Forward Market Commission (FMC) under Forward Contracts(Regulation) Act, 1952.However if commodity future is booked by a person, to guard against loss through future price fluctuations in respect of his contracts foractual delivery of goods manufactured by him or merchandise sold by him, then it will not treated as speculation. 4
  5. 5. 18-02-2012DIVIDEND DISTRIBUTION TAX (DDT)Dividends on shares or mutual fund received will not be taxable on the hands of theassessee. It is not a direct tax paid by the investor therefore, he cannot file forexemption from distribution tax. The dividend distribution tax will be payable bycompany / mutual fund. Categories Equity Share Equity Other Debt Funds Money Market / Funds Liquid Funds Individuals & HUF 16.223% Nil 13.52% * (12.5% + SC + Cess) 27.04% * (25% + SC + Cess) Others / Corporates 16.223% Nil 32.45% * (30% + SC + Cess) 32.45% * (30% + SC + Cess) NRIs 16.223% Nil 13.52% * (12.5% + SC + Cess) 27.04% * (25% + SC + Cess) * including a Surcharge of 5% and an additional education cess of 3% on the amount of taxSECURITY TRANSACTION TAX (STT) STT is a tax being levied on all transactions done on the recognized stock exchanges. STT is applicable on purchase or sale of equity shares, derivatives, and equity oriented funds Switch and redemption of equity oriented mutual funds. It is not applicable in case of government securities, bonds, debentures and units of mutual fund other than equity oriented mutual fund.Transaction in recognized stock exchange STT - Rate Paid bySale of unit of an equity oriented fund to a Mutual Fund 0.25% SellerDelivery based transactions in equity shares or purchase and sell of units of an 0.125% Purchaser / Sellerequity-equity-oriented fundNon - delivery based transactions in equity shares 0.025% SellerSale of Derivatives (on the Premium Amount) 0.017% SellerSale of an Option in Securities 0.017% SellerSale of derivatives (where the option is exercised) 0.125% PurchaserGold ETF / Gold Bar / Gold Futures Nil NA 5
  6. 6. 18-02-2012TAX DEDUCTED AT SOURCE (TDS)The tax deducted at the time of payment or redemption by the issuer of the security and deposited with theGovernment. This tax is deducted by the issuer from income payable to the investor and the investor getscredit of the same while filing his annual return of tax.In cases where the Individual / HUF / AOP / BOI is not liable to pay tax on interest earned on FDs, he mayclaim an exemption from TDS by filing a Form 15H and 15AA for any other person with the issuing body ofthe security (whoever deducts TDS).A TDS certificate is issued in the name of the investor mentioning the details of the transaction and the taxdeducted. The TDS certificate is commonly issued in Form16 A.Categories of Investors MF Equity & Stocks Listed on MF Debt and Unlisted stock Interest on FDs recognized stock exchangeIndividuals & HUF Nil Nil 10%*Domestic Companies Nil Nil 20%*NRIs STCG - 15%* STCG - 30%* 30%* LTCG - Nil LTCG - 20%* (After providing for indexation)*Additional education cess of 3% on the amount of taxSURCHARGE AND EDUCATION TAXSurcharge It is a charge in addition to a charge, or a tax added to the original tax. Surcharge has been completely removed/abolished in case of individual and partnership firms. Surcharge @ 5% is applicable only incase of Domestic Company (Any company registered in India – Private & Public ) if total income exceeds Rs. 1 CrEducation CessTo give a boost to primary education in the country and in conformity with the Common MinimumProgramme of the UPA government, a Education cess is levied on income tax, corporation tax, excise andcustoms duties and service tax. The education cess is to be paid on the tax payable (inclusive ofsurcharge, if any) Investment Category Surcharge rate Education Cess Individual/HUF/AOP/BOI Nil 3% Domestic Company if total income is < 1 crore Nil 3% Domestic Company if total income is > 1 crore 5% 3% 6
  7. 7. 18-02-2012EQUITY MF ORIENTED SCHEME Investor Category Short Term Capital Long Term Capital Dividend Income Dividend TDS Gain Tax Gain Tax Distribution Tax (holding period (holding period > < 12 months) 12months) Residential 15%* Nil Tax Free Nil Nil Individual/ HUF Partnership 15%* Nil Tax Free Nil Nil Firms/AOP/BOI Domestic Companies 15% *$ Nil Tax Free Nil Nil NRIs 15%* Nil Tax Free Nil STCG- 15%* LTCG – Nil TDS – Tax deducted at Source HUF – Hindu Undivided Family AOP- Association of Persons BOI- Body of Individual *Additional education cess of 3% on the amount of tax $ Additional surcharge of 5% and an education cess of 3% on the amount of taxDEBT MF ORIENTED SCHEME Investor Category Short Term Long Term Dividend Dividend Dividend TDS Capital Gain Capital Gain Income Distribution Tax – Distribution Tax Tax Other than Liquid Tax - Liquid & (holding period (holding period & Money Market Money Market <12months) >12 months) Schemes Schemes Residential As Per Tax Slab 10%(20% with Tax Free 13.519% # 27.038 # 27.038% Nil Individual/ HUF indexation)* Partnership 30%* 10%(20% with Tax Free 32.445% # 32.445% # Nil Firms/AOP/BOI indexation)* Domestic 30%*$ 10%(20% with Tax Free 32.445% # 32.445% # Nil Companies indexation)$^ NRIs As Per Tax Slab 10%(20% with Tax Free 13.519% # 27.038 # 27.038% STCG- 30%* indexation)* LTCG- 20%* (After providing for indexation) TDS – Tax deducted at Source HUF – Hindu Undivided Family AOP- Association of Persons BOI- Body of Individual*Additional education cess of 3% on the amount of tax$ Additional surcharge of 5% and an education cess of 3% on the amount of tax#DDT includes 5% surcharge and 3% education cess 7
  8. 8. 18-02-2012DIRECT EQUITY TRADING TAXATION If considered as If considered as non – business Income business Income Long Term Dividend Investor Short Term Short Term Long Term Capital Gain Distribution Category Capital Gain Capital Gain Capital Gain Dividend Tax Tax TDS Tax Tax Tax Income (> 12 (Paid by the (< 12 mnths) (< 12 mnths) (> 12 mnths) mnths) companies) Residential As per tax NIL Individual/ 15 %* NIL Tax Free 16.609%# NA slab HUF Partnership 15 %* As per tax Firms/AOP/ NIL NIL Tax Free 16.609%# NA slab BOI Domestic As per tax 15 %*$ NIL NIL Tax Free 16.609%# NA Companies slab As per tax STCG – 15%* NRIs 15 %* NIL NIL Tax Free 16.609%# LTCG - Nil slabTDS – Tax deducted at Source HUF – Hindu Undivided Family AOP - Association of Persons BOI - Body of Individual* Additional education cess of 3% on the amount of tax$ Additional surcharge of 5%# DDT includes 5% surcharge and 3% education cessTAXATION ON DEBENTURES Listed Debentures Unlisted Debentures Investor Long Term Short Term Capital Long Term Capital Short Term Category Capital Gain Interest Gain Tax Gain Tax Capital Gain Tax TDS Tax Income (< 12 mnths) (> 12 mnths) (< 36 mnths) (> 36 mnths) Residential As per tax slab 11.33% As per tax slab 22.145% 33.21% NA Individual/ HUF Partnership As per tax slab 11.33% As per tax slab 33.21% NA Firms/AOP/ BOI 22.145% Domestic As per tax slab 11.33% As per tax slab 22.145% 33.21% NA Companies STCG – 15%* NRIs As per tax slab 11.33% As per tax slab 22.145% 33.21% LTCG - NilTDS – Tax deducted at Source HUF – Hindu Undivided Family AOP- Association of Persons BOI- Body of IndividualPremium receivable on redemption of debentures could be considered as interest income. 8
  9. 9. 18-02-2012PMS TAXATION Short Term Long Term DDT Capital Gain Tax Capital Gain Tax Dividend Investor Category (Paid by the TDS (holding period < (holding period > Income companies) 12 mnths) 12 mnths) Residential 15 %* NIL Tax Free 16.223%# Nil Individual/ HUF Partnership 15 %* NIL Tax Free 16.223%# Nil Firms/AOP/ BOI Domestic 15 %*$ NIL Tax Free 16.223%# Nil Companies STCG – 15%* NRIs 15 %* NIL Tax Free 16.223%# LTCG – NilTDS – Tax deducted at Source HUF – Hindu Undivided Family AOP- Association of Persons BOI- Body of Individual Portfolio Manager is just an agent Purchases & Sales is in name of client and therefore the tax liability is on the client Detailed summary /account statement is furnished to the client by the PMS for his taxation purpose each financial year Incase the PMS has generated STCG and the income has not been distributed to the investor in that financial year, he is still liable to pay tax for that particular financial year*Additional education cess of 3% on the amount of tax$ Additional surcharge of 5% and an education cess of 3% on the amount of tax#DDT includes 5% surcharge and 3% education cessPRIVATE EQUITY TAXATION Unlisted Listed on recognized stock exchange Short Term Long Term Long Term Dividend Short Term Interest Capital Gain Capital Gain Capital Distribution Type of Capital Gain Dividend Income Tax Tax Gain Tax Tax Instrument Tax Income (paid by (< 12 (> 12 (> 12 (Paid by the (< 12 mnths) Investor) mnths) mnths) mnths) companies) Equity As per tax 20%* with 15%* NIL Tax Free 16.223%# NA Shares slab indexation Benefit of indexation is available for LTCG in case of Equity shares but not in debentures STCG and LTCG is paid by the investor Purchases & Sales is in name of the client and therefore the tax liability is on the client Detailed summary /account statement is furnished to the client by the PE vehicle for his taxation purpose each financial year Income earned by a domestic SEBI registered VCF (whether a trust or a company) from an investment in a venture capital undertaking is exempt from tax. Such VCFs have been accorded a “pass through” status, i.e., the investors in the VCF are directly taxed on any income distributed by the VCFs as though the investors have made direct investments in the portfolio companies. However, to avail this “pass through” status, the VCF’s investments must be made in domestic companies in the nine specified sectors only *Additional education cess of 3% on the amount of tax # DDT includes 5% surcharge and 3% education cess 9
  10. 10. 18-02-2012GOLD TAXATION Investment mode STCG (holding period < LTCG (holding period >12months) 12months) Gold ETFs As per Tax slab 10% (20% with indexation) STCG (holding period < LTCG (holding period >36months) 36months) Gold Bar / Jewellery As per Tax slab 20% with indexation STCG (holding period < 36months) Gold - Futures As per Tax slabWhile gains are taxed, a loss in gold ETF will be available as a set-off too. The only restriction is that a long-term capital losswill be available for a set-off against a long-term capital gain only, while a short-term capital loss can be set off eitheragainst a long-term capital gain or a short-term capital gain . Short-term capital gains can be adjusted against short-termcapital losses.Tax liability arising from long-term capital gains, on the sale of gold or other jewelery can be optimised by investing in aresidential house under Section 54F or any other specified assets like capital gains bonds under Section 54EC.REAL ESTATE TAXATION STCG LTCG ( holding period (holding period < 36 months) > 36 months) Real Estate As per Tax slab 20% with indexationTax on long term capital gain can be avoided if the sale relates to a property other than one residentialaccommodation and reinvested in any residential property within a period of 1 year before or 2 years after thedate of transfer (Section 54 F)Long term capital gain is exempt if the capital gains are invested within 6 months in 3 year bonds issued byREC or NHAI and that investment is retained for three years.Investment cannot exceed Rs 50 lakhs - section 54EC of Income Tax Act. 10
  11. 11. 18-02-2012INSURANCE TAXATION At the time of Interest & On Maturity On Death Withdrawal & Surrender DividendTraditional Plans Tax free - After 2 NA Tax Free Tax FreeE.g.-Money Back Plan, completed policy yearsEndowment PlanULIPs Tax free - After 2 NA Tax Free Tax Free completed policy yearsPensions Plans As per tax Slab NA One third of the Tax Free commuted Fund Value is tax free, 2/3rd is taxable as per tax slab.However any sum (not including the premium paid by the assessee) receivedunder an insurance policy issued on or after the 1st day of April, 2003 in respectof which the premium payable for any of the years during the term of the policyexceeds 20% of the actual capital sum assured will no longer be exemptedALL ABOUT SECTION 80 C Section 80C of the Income Tax Act allows certain investments and expenditure to be tax-exempt. The total limit under this section is Rs. 100,000 (Rupees One lakh) this is irrespective of how much you are earn and under which tax bracket you fall. Investments that fall under Section 80C are listed as below. Employees Provident Fund Public Provident Fund Life Insurance premium Pension plans Equity Linked Saving Schemes (ELSS) of mutual funds Bank Fixed Deposits National Savings Certificate Senior Citizens Savings Scheme (SCSS) New Pension Scheme (NPS) Additional Rs 20,000 can be invested in Infrastructure Bonds – Sec 80CCF Besides these investments, the payments towards the principal amount of your home loan are also eligible for an income deduction. All the above must be made from the current years earnings and not past earnings. So if you are paying tax for the financial year 2010-11, then your investments must be made from earnings during this period. 11
  12. 12. 18-02-2012TAXATION FOR SEC 80 C INVESTMENTSInstrument Tax TreatmentEmployees Provident Fund Contribution, Return and Maturity Proceeds are all tax exempt (EEE)Mutual Funds – ELSS Contribution, Return, Dividends and Redemption Proceeds are all tax exempt (EEE)Senior Citizen Savings Scheme Interest taxableFixed Deposit > 5 years Interest taxable5 year Post Office Time Deposits Interest taxableInfrastructure Bonds Interest taxableINABARD Rural Bonds Interest taxableNational Savings Certificate Interest taxableNew Pension Scheme (NPS) Maturity Proceeds taxableTAXATION FOR OTHER SMALL SAVINGS SCHEMESInstrument Tax TreatmentPost Office Monthly Income Scheme Interest income is fully taxableKisan Vikas Patra Interest income is fully taxablePost Office Recurring Deposit Interest taxable8% GOI Taxable Bonds Interest income is fully taxable 12
  13. 13. 18-02-2012WEALTH TAXWealth tax is leviable on specified assets at 1 percent on the value of the net assetsplus surcharge and cess as held by the assessee (net of debts incurred in respectof such assets) in excess of the basic exemption of INR 30,00,000.00SECTION 80D – MEDICAL INSURANCE PREMIUM Self, Spouse and Parents (below Parents (above Children 56 years) 56 years) Assessee Rs 15,000 Rs 15,000 Rs 20,000If the Assessee is a Senior Citizen then tax exemption on Premium is extended to Rs 20,000Section 80-DD provides deduction in respect of expenditure incurred on the maintenanceand medical treatment, of a dependent who is a person with severe disability. The deductionamount under this Section has been increased from Rs 75,000 to Rs 100,000 13
  14. 14. 18-02-2012DIRECT TAX CODE – PROPOSED CHANGES Proposed Income Tax slabs Assessee Total Income Tax rate Men & Women Rs. 0 – 2,00,000 Nil Rs. 2,00,001 – 5,00,000 10% Rs. 5,00,001 – 10,00,000 20% Rs. 10,00,001 or more 30% HRA, LTA and Medical Allowance to be fully taxable No Only half of Short-term capital gains will be taxed EET system to be introduced for all investments All gains to be added to the total income and taxed as per the income slab of the investor. Indexation benefit to be allowed Tax Savings instruments limit to remain at Rs 1,00,000 ; Additional Rs 50,000 for pure life insurance Investments in ELSS, ULIPs, Senior Citizen Savings Scheme, Bank Fixed Deposits, NSC will not be considered for the purpose of tax saving exemption EEE to be allowed for provident funds (GPF, EPF and PPF), NPS, Retirement benefits (gratuity, leave encashment, etc), pure life insurance products & annuity schemes. Surcharge and education cess are abolished. Max limit for medical reimbursements has been increased to 50,000 per year from current 15,000 limit. THANK YOUFor any further information, please contact:Mr. Virendra Kothari, CAIA, CFPM:+91 98677 42732E: virendra.kothari @eticawealth.comÉtica Wealth Management Private Limited501, T-39 Sunshine Building,Shastri Nagar,Lokhandwala Complex Road,Andheri West,Mumbai – 400 053Landmark: Suburban Diagnostics, Near Lokhandwala CircleT: +91 22 2632 9644 +91 22 4264 8740E: info@eticawealth.com 14

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