Checklist for capital gain income from sale of Shares or Mutual Fund

‘I have earned income from sale of shares during the Financial Year 2014-15. What would be the tax implication on this?’ is the most common question I encounter during tax filing season every year. The summary tax provisions for sale of shares or mutual funds are listed below. Hope this helps.

1. Get the statement of account or transaction statement. Normally, the brokers/service providers give a statement showing date of sale, date of purchase, units sold, realized profits – short term or long term.

2. Check the type of units. The two major categories are-
   1. Sale of Equity Fund
   2. Sale of Debt Fund (it is also called as Non-Equity funds)

3. How to identify Equity Fund
   1. Growth Fund
   2. Equity Diversified
   3. Arbitrage Fund

4. How to identify Debt Fund – The most popular debt funds / its variants are –
   1. Gold ETF
   2. Liquid Fund
   3. Ultra Short Term Fund
   4. Floating Rate Fund
   5. Short Term Income
   6. Dynamic Income
   7. Income Fund
   8. Gilt Fund
   9. Hybrid – debt oriented
   10. Monthly Income Plan (MIP)
   11. Fixed Monthly Plan (FMP)
   12. Global Funds
   13. Gold Funds

5. Tax on Equity funds

• Short Term (period of holding is less than 12 months) – 15.45%
• Long Term (period of holding is more than 12 months) – NIL

6. Tax on Debt Funds

• Short Term (Period of holding is less than 36 months) – Normal tax as per applicable tax slabs.
• Long Term (Period of holding is more than 36 months) – 20.60% with indexation

7. Securities Transaction Tax (STT) – STT is paid on Equity funds only. No STT is applicable for Debt funds.

8. Dividend Earned
   1. Is exempt in the hands of the investor in both equity and debt funds.
   2. Dividend on equity fund is exempt in the hands of Mutual Funds also
   3. Dividend on debt funds is subject to Dividend Distribution Tax (DDT) of 28.33%. This means the dividend received in the hands of the investor will be net of DDT.

So, friends, while computing the income from Capital Gain on sale of Shares, you have to consider the above information very carefully.

Part II

Let me also write about equity shares.

1. Sale of equity shares – If the purchase and sale of listed equity shares is in the nature of investment, the gains arising out of such transactions shall be exempt if the following conditions are fulfilled:

• The gains should be in the nature of long-term capital gains – i.e. the listed equity shares should have been held for a period of more than 12 months.
• The sale should have been subjected to securities transaction tax. (exemption available under section 10(38))
• In case, the shares are sold within 12 months, 15.45% tax to be paid on the profits.

2. Trading in equity shares–If the assessee is into the business of trading in equity shares, then the provisions of capital gains shall not apply, since, the definition of capital asset under Section 2(14) excludes assets held as stock in trade.

In this case, the taxable profit shall be determined by applying the general rules for computing income from business i.e. – Sale – Purchase and related expenses.

3. Futures and options – Derivative transactions entered into by assessees through recognized stock exchanges through registered brokers are considered ‘non-speculative’ in nature.In this case, the profits and losses arising out of the transactions are determined by applying the general rules for determining business income i.e. Sale-Purchase and related expenses.

For the purpose of determining the turnover under section 44AB of the Income tax act, the aggregate of the favourable and unfavourable (i.e. absolute values) differences should be considered. Further, premium received on sale of options and the absolute differences on account of reverse tradeshould also be added to the turnover.

4. Speculation in equity shares – In case of speculative business, the income is computed by netting off the favourable and unfavourable differences between the sales and purchases.

For the purpose of determining the turnover under section 44AB of the Income tax act, the aggregate of the favourable and unfavourable(i.e. absolute values) differences should be considered.

5. Sale of unlisted Shares

• Suppose, the shares of private limited company are sold within 36 months, then Normal rate of tax as per the slab is applicable
• If the shares are held over 36 months, then 20% tax with indexation is to be paid.

Important Note: If you are computing the income for the previous year i.e., Financial Year 2014-15, you have to make note of the following –

• In case of Sale of Debt Mutual Fund and unlisted Equity Shares between 1^st April 2014 and 30^th June 2014, the holding period is to be considered as 12 months instead of 36 months to calculate the short term or long term capital gain.

• Secondly for the sale of long term debt mutual fund and unlisted equity shares in the above period, you have the option of choosing 10.3% tax without indexation. This benefit is withdrawn from 1^st July 2014.

Thought for the day

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