Title: Your long-term equity gains could turn taxable Summary: If you haven’t got taxation on your radar while making decisions related to equity investments after holding them for more than a year, these taxation rules would be an eyeopener for you. Shares help for long-term too may be taxed if you make mistake while purchasing more or selling them the wrong way. Main Story We always read that there is no tax implication on equity or stocks and shares, as they are called in common parlance, provided one holds them for more than 12 months. Yes, there isn’t any tax liability in the long-run, as long as you purchase them through a regular exchange sale, hold them and again sell them on the exchange through the regular route. Any alteration in the way you offload these shares or acquire them could lead to a tax burden on the income that would otherwise have been tax exempt. Find the most common mistakes that could turn your long-term equity gain taxable.
Sale of Shares Even though shares sold move from one demat account to another, how they move decides how a shareholder would be taxed.
Open offers Several open offers hit the market each year. Many are tempted to sell via the open offer route if the company is offering attractive prices. But if shares are sold through open offers then the sale is considered as a debt transaction because the promoters are offering to purchase your shares for money. If you tender your shares through an open offer you would have to bear taxes on the gains. This is because there is no long-term taxation on equity, but debt funds are taxed at 20% on completion of 12 months (prior to July 10, 2014) or 36 months (after July 10, 2014). Buy-back at fixed price Though regular buy back offers don’t result in a tax burden, buy-backs made at a fixed price create a tax liability. When companies offer to buy back at a fixed price, the shares are transferred to a special demat account created. This is an off-market sale and hence Securities Transaction Tax (STT) isn’t paid. So, you would have to bear the load of taxes.
Purchase of Shares
Just like the way shares are sold decides taxation rules applicable, the mode of acquiring these shares to has a say in the tax liability. Bonus Shares The shareholder need not pay any tax in the year in which a company issues bonus equity shares. An issuance of bonus shares is considered to be dividend and hence the price of acquiring these shares is considered as zero. As a result, when these bonus shares are sold, the total sales proceeds would be taxed as capital gains. Bonus preference shares These aren’t considered and taxed as dividends, but will be subject to capital gains. When bonus issues of preference shares are distributed the shareholder is not taxed. The company issuing the shares too cannot claim a deduction from its taxable income. But when the bonus preference shares are sold, the purchase cost of the preference shares is considered nil. Hence, the entire amount transacted would be taxed as capital gains in the hands of the shareholder. Conclusion: Be mindful of these share sales and always check whether these are sold after being subjected to STT. Share buy-backs are better off than open offers. This is because when you tender shares under a buy back scheme the company purchases the shares just like any other investor. A major difference is that STT is paid and hence the sale is exempt from tax after it has been held for more than a year. Though the holding period for any equity investments to be termed long-term is 12 months, the debt investments qualify for long-term taxation only if held for more than 36 months (post July 10, 2014). Remember that as per the current taxation norms, debentures prove to be more tax-efficient than preference shares considering the life of preference shares vis-a-vis debentures. Calculate the loss in terms of taxation while making note of the actual gains. About Author/ Resource Box: H&R Block India strives to blend tax expertise with a strong focus on continually improving the client experience to provide all its clients with an unparalleled value proposition for filing their Income Tax Online.