details regarding stock market including bonus stripping and dividend stripping. created by me for CA alok shah. vadodara.

1. Capital Market and Tax
Planning
By: CA (Dr.) Alok Shah
Partner
Contractor, Nayak & Kishnadwala
Chartered Accountants
Investor Awareness Programme- Vadodara Stock Exchange Ltd.
23.06.2012

2. 1.
2.
3.
4.
5.
6.
7.
Meaning of Capital Gains and Tax thereon
Long Term and Short Term Capital Gain
Taxation on Capital Gain on Shares and
Securities
Taxation of certain Transactions related to
Capital Market
Taxation of Mutual Fund Transactions
Taxation of Debentures
Tax Planning

3. 
Capital gain is a Profit that results
from transfer of investments
of Capital Asset/s, such
as Shares, Bonds, Land, Building, etc.,
which exceeds the purchase price.

4.  Capital
gains tax (CGT) is
a tax on capital gains i.e. tax
on the profit that arise on
the sale/transfer of a Capital
Assets.

5. Investments in shares or mutual
funds (whether quoted or not)if held
for a short period (12 months or less)
is taxed as short term capital gains.
A long term capital gain arises when
holding of shares or mutual funds is
for a long period (more than 12
months).

6. For Long Term Capital Gain:
conditions
Tax payer is an individual, HUF,
or any other person(Whether
Resident or Non-Resident)
Securities(Shares or mutual
funds units) are held for long
term

7. Option 1:
i. Find out the sale consideration
ii. Deduct: indexed cost of acquisition,
modification, expenses on transfer
iii. Balance amount---(i-ii)---is LTCG
iv. Tax Shall be 20% of (iii)+EC+SHEC

8. Option 2:
i. Find out the sale consideration
ii. Deduct: Cost of acquisition (without
Indexation), modification, expenses on
transfer
Balance amount---(i-ii)---is
LTCG
iv. 10% of (iii)+EC+SHEC
iii.

9. 

Equity shares & Equity oriented
Mutual funds held for long term which
are subject to Securities Transaction tax
are Tax exempt.
Capital loss computed from source
with indexation can be set off against
capital gain computed without
indexation from another source.

10. The tax payer has liberty to choose
option 1 for some transactions and
option 2 for other Transactions.
 All the transactions of share
transfer through stock exchange are
Subject to STT.


11. 1
2
3
Tax payer is an individual, HUF,
or any other person(Resident or
not) .
During the year there is a transfer
of short term capital assets (here
shares or mutual funds).
Transactions are subjected to
securities transaction tax.

12. If all the above conditions are
satisfied than. . . . . . . . . . . . . . . . . . . . .
.......................

13. 








Right shares
Bonus shares
Futures & Options(F&O)
Dividend on shares
Stock splits
Demat account
Day trading
General
Deductions

14. Rights
issue to shareholders is generally
made on the basis of proportionate
holding(e.g. One subscription right for
one share held).
When additional shares are offered to
existing shareholders at a price(usually
less than original price), it is termed a
rights issue.

15. 

Cost of Acquisition :The price at
which the rights issue is made is treated
as cost of acquisition. Right Issue is
normally at a discount to the market
price.
Date of acquisition: The date of
allotment of right shares is treated as
the date of purchase. It will attract tax
depending on the tenure for which it is
held.

16. If a person transfer the rights to
subscribe for shares, the cost of
acquisition of such rights
is to be taken as ‘Nil‘.
 The entire amount of consideration of
such transferred rights will be taken
as capital gain.


Period of Holding : It is Computed
from the date of offer, made by the
company
to
the
date
of
renouncement.

17. 



Shares are given to the shareholders
without any consideration.
Date of Acquisition : The holding
period is calculated from the date of
allotment of Bonus shares.
Cost of acquisition :the cost of
acquisition is zero.
Depending on the period for which it is
held, it will be treated as short term or
long term.

18. 

In bonus stripping, investors buy shares
of companies which have announced
bonus issues, and subsequently, sell the
original holding at a loss once the stock
becomes ex-bonus.
This loss can’t be adjusted against
capital gains on other holdings if it is
transferred with in a period of 9
months.

19. 

The provision of the Income Tax Act, 1961
treats income from futures & options (F & O)
as normal business income.
Incase of F & O for Tax Audit u/s 44AB
turnover is determined by grossing up of the
difference of all the trades entered, whether
positive or negative. Premium received on
sale of option is to be added. Difference on
reverse trades is also to be considered.

20.  As
income from futures &
options (F & O) will be
treated as normal business
income and not speculative
business income, so, one can
set off the loss from F & O
against normal business
income, including short-term
capital gains.

21.  It
is not taxable in the
hands of the recipient,
however, the company
declaring dividend has
to pay Dividend
Distribution Tax.

22. 

Dividend stripping is the purchase
of shares just before a dividend is paid,
and the sale of those shares after that
payment, i.e. when they go ex-dividend.
Loss that may arise on sale of shares
shall not be allowed to be set-off
against the other short term capital gain
to the extent of dividend, provided such
transfer takes place within a period of 9
months from declaration of dividend.

23. 

This refers to reduction in the
denomination of the shares by reducing
the face value of the share. That will
result in a corresponding change in the
market value.
Date of Acquisition : The date of
buying the original shares is treated as
the date of acquisition and the gains are
taxed in the same proportion as the
split.

24. In case of Demat accounts, the capital
gains on sale of shares will be
computed on the basis of the FIFO
with reference to the particular account
from where the shares are sold.
 Why?:-The FIFO method was
introduced to bypass the process of
determining the cost on one to one
basis with the particular
DP(depository participant).


25.  If
one is paying STT on daily
trading of shares (Provided
shares are delivered through
Demat Account), it would be
considered as short term
capital gain and subject to
tax @ 15%.

26. 
A Speculative transaction is a
transaction in which a contract for
purchase or sale of a commodity
including stocks or shares is
periodically or ultimately settled
otherwise than by actual delivery or
transfer of the commodity or scrip.

27. 


A contract in respect of Raw material or
merchandise entered in the normal course of
business to guard against loss due to price
fluctuations.
A contract in respect of stocks and shares
entered into by a dealer or investor to guard
against loss through price fluctuations.
A contract entered into by a member of forward
market or a stock exchange in the course of
jobbing or arbitrage to guard against loss in the
ordinary case.

28. 
The Central Board of Direct Taxes (CBDT)
through Instruction No.1827 dated August 31,
1989 had brought to the notice of the assessing
officers that there is a distinction between
shares held as investment (capital asset) and
shares held as stock-in-trade (trading asset). In
the light of a number of judicial decisions
pronounced after the issue of the above
instructions, it is proposed to update the above
instructions for the information of assesses as
well as for guidance of the assessing officers.

29. 
CBDT also agree on that, it is possible for
a tax payer to have two portfolios (it is
more desirable to have multiple Demat
account to satisfy this aspect), i.e., an
investment portfolio comprising of
securities which are to be treated as
capital assets and a trading portfolio
comprising of stock-in-trade which are to
be treated as trading assets. Where an
assessee has two portfolios, the assessee
may have income under both heads i.e.,
capital gains as well as business Income.

30. 


As long term capital loss can’t be set off against
short term capital gain, one will be able to
minimize his tax liability if he sell a security
incurring short term losses in the same year.
While calculating net gains, take the
transaction cost of buying and selling into
consideration.
Income from Shares transactions earned by
different family members thereby splitting
the income and lowering the overall tax.

31. 




Shares/Investments Received
through Inheritance or Gift or Will
Investment in the Name of Spouse
Investment in the name of the
Minor Children
Transfer of Funds from One
Account to another within family
members
Wealth Tax

32. 

A capital loss (short-term/long-term)
can be carried forward for a maximum
period of 8 years from the assessment
year in which the loss was first
incurred.
Short-term capital loss can be set off
against any capital gain (long-term and
short-term). However a long-term capital
loss can be set off only against a long-term
capital gain.

33. Deduction available in sec 54EC
and 54F of income tax act 1961
 54EC: Benefit of deduction is
available only in respect of longterm capital gain. (Ex. Long Term
Capital gain on sale of
shares/debentures of unlisted
company etc.)


34. Purchasing Asset : Any Bonds
specifically notified under this
section and
1. Issued by National Highway
Authority of India (NHAI).
2. Issued by Rural Electrification
Corporation Limited (RECL).
 Lock in Period: All the bonds should
be redeemable after three years, only.


35. 

Once a person avail the deduction
u/s 54EC, he can't claim deduction
u/s 80C for the same amount.
If the long-term specified asset is
transferred at any time within a
period of three years from the date
of its acquisition, then the amount
exempt from Capital Gains will be
chargeable to Income tax in the year
in which it is transferred.

36. 

54F: This benefit is only in respect of longterm capital gain.
What should be done to avail this deduction?:
 One have to construct a new residential
house within Three years from the date
of transfer, or
 One should have purchased a residential
house One year before, or
 One have to purchase a residential house
Two years after the date of transfer
 Other conditions to satisfy

37. 1.Short Term Capital Gain:
Short term capital gain arising from the
transfer of equity oriented scheme are
taxed at 15 % provided STT has been
charged.
2. Long Term Capital Gain:
long term capital gain arising from the
transfer of equity oriented scheme are
exempt from tax in the hands of unit
holder provided STT has been charged.

38. 1.Short term capital gain:
Short term capital gain arising from the transfer
of scheme other than equity oriented scheme
are added to the total Income of the tax payer
and taxed at the applicable slab rates of the
assessee.
2. Long term capital gain:
Long term capital gain arising from the
transfer other than equity oriented scheme are
taxed as normal provisions of long term capital
gain tax.

39. 1. Short term capital gain :
Short Term Capital Gain is taxable @ the
applicable slab rate.
2. Long term capital gain:
LTCG on sale of Debentures is not exempt
from tax. It is taxable at special rate of 20 %.

40. 

domestic companies that declare, distribute or
pay dividends are subject to dividend
distribution tax at 16.2225% on the amount of
such dividends
specified company or mutual fund is taxable
at differential rates as follows :
Income distributed from the Money
market/liquid funds is taxable at 27.0375%
Income distributed from other mutual funds
to individuals or HUFs is taxable at
13.51875% and to others at 32.445%.

41. Market Type
Futures &
Options
Current Rate (2012-13)
0.017%
Capital Market
(Delivery)
0.1%
Capital Market
(Intra-Day)
0.025%

42. 
Investment in shares offers double
advantage of earning tax free
dividend and securing tax free
capital appreciation over a long
period of time. Thus it is an ideal
way to beat inflation and if rightly
handled it can turn out to be one of
the finest avenues of Investment.

43. 1.
2.
3.
4.
Income classification done away
Concept of long term & short term and
differential tax rate done away
Indexation benefit will be available if
the assets are held for a period
exceeding one year
All types of capital gains would be
taxable at normal rates of tax

44. 5.
If the STT is chargeable on transfer of
equity shares/units in equity oriented
funds, 100% deduction would be
allowed if investment is held for more
than one year and in other cases 50%
deduction will be allowed.

45. CA (Dr.) Alok Shah
Partner
Contractor, Nayak & Kishnadwala
Chartered Accountants
Email: alok@cnkindia.com