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All About Investment In Equity Shares & Tax Planning

During the time slot of COVID-19 Pandemic record breaking DEMAT a/c and Trading accounts have been opened in Share Market in India. As per data of SEBI, till January 2021 total 15 crores DEMAT accounts have been opened in India out of that approximately 1.42 crores new DEMAT accounts have been opened in Year 2021 itself.

You can directly invest in Share market or via mutual funds.

People are earning high profits by investing in shares through IPOs and selling the same on listing day. How

What are equity shares?

When the business established in Company form, their capital is divided into small parts each such part is known as a Share and the total capital is known as Equity Share Capital. Investors who invests their money in equity shares are known as Equity Share holders.

How to Invest in Equity Shares?

These are the ways to invest in equity shares:

  1. Investment in Unlisted Equity Shares :

Those equity shares which are not listed in any Recognized stock exchange (B.S.E / N.S.E) are known as unlisted equity shares. On purchase or sale of such shares Securities Transaction Tax is not levied.

  • Investment in Listed Equity Shares :

The equity shares which are listed in any Recognized stock exchange are known as listed equity shares. On sale or purchase of such shares the Indian government collects Securities Transaction Tax at a fixed rate.

  • Investing in Equity Shares :

When a company making profits is functioning on a small scale wants to expand their business which needs a big amount of funding but the promoters have a limited capital then the company collects such capital from public. For that they need to complete a lot of legal formalities.

When the company offers its shares to public for the first time at a fixed price, it is known as IPO and it is considered as Primary Market as shareholders can directly get the shares from the company itself and make investment. When the company allots the shares to the shareholders those shares gets listed in Stock Exchange.

Thereafter the shareholders can undertake buying or selling transactions of such listed shares on the Stock Exchange, which is known as the Secondary Market. SEBI is the regulatory authority and principal regulator for Stock Exchanges which was established under the SEBI Act 1992 and is the ndia.

What are the mandatory al things required for investing in Share Market?

  • Pan Card
  • DEMAT Account
  • Trading Account
  • Bank Account

For making payments or receiving payments for buying / selling shares your trading account should be linked to your bank account.

How transactions takes place in Share Market?

You can use stock brokers like Zerodha etc. for buying or selling of shares.

What are the expenses took place in transactions in Share Market?

To undertake sale/purchase transactions in a Recognized Stock Exchange the following expenses needs to be incurred:

  1. Brokerage
  2. Securities Transaction Tax ( S.T.T)
  3. Stamp Duty
  4. Stock Exchange Charges
  5. Depositary Participant Charges
  6. SEBI Turnover Charge
  7. GST, etc.

♦ You need to pay tax on profits that arise on sale of shares.

Most of the time the new investors are not aware of the tax liability on the sale of shares and due to that more often they have to pay taxes along with interest and penalties.

The details of sale /purchase of shares are easily available to Income Tax department as your DEMAT/trading / Bank account is linked to your PAN card and Aadhar Card.

How to calculate tax liability on long term capital gains?

Before the union budget was introduced in 2018, the long term capital gains on sale of equity shares was totally exempted from tax. Government introduced section 112A from F.Y 2018-19 onwards LTCG exceeding Rs. 1 lac will be taxable @ 10%.

Grand Fathering Clause :

In India before 01 April 2018, long term capital gains on sale of equity shares as fully exempt however after 01 April 2018 this exemption is limited to Rs. 1 lac.

On 01 Feb 2018 by budget 2018 the government imposed 10% tax on such LTCG exceeding Rs. 1 lac. As per Grandfathering clause came into force which says if shareholders has invested in equity shares before 31 January 2018, then the market value of shares on that date (31 Jan 2018) or the actual cost of acquisition (purchase cost) whichever is higher will be considered as the purchase cost and will be deducted from sales consideration to arrive at the capital gains value. Thus with the insertion of this clause any gains till 31 Jan 2018 will be considered as grandfathered and thus will be exempt from tax.

♦ Important Points :

  1. According section 112A LTCG to the extent of Rs. 1 lac for a FY is exempt.
  2. If the LTCG exceeds 1 lac then tax will be calculated on the amount of gain exceeding Rs. 1 lac.
  3. While calculating tax liability on LTCG you will be not be liable to get the deductions Income tax act 191- u/s 80C – 80U and rebate u/s 87.
  4. To pay less tax on the gains arising out of equity shares you need to hold the shares for a period of more than 12 months.

Short Term Capital Gains

When you sale listed equity shares within 12 months or less period of time then the profits or loss from such transaction will be considered as STCG or short term capital loss.

What is the rate you have to pay tax on short term capital gains?

According to the section 111A, short term capital gains on sale of equity shares or equity oriented mutual funds through a recognized stock exchange where STT is paid attracts tax at the rate of 15%.

How can you decide whether you trading business in Share Market or just investing funds?

According to the CBDT circular 6/2016 on 29th Feb 2016, assessee can decide themselves whether to treat the purchase of shares as investment or as stock in trade for business.

However once a stand is taken by the assessee for a particular AY will be applicable to subsequent AY, the treatment cannot be changed thereafter. That means before filing your ITR you have to decide that whether you want to treat the sale purchase transactions undertaken by you as Investment (Capital gains/ loss) or Trading Activity (Business Income).

What is more beneficial?

If you consider your transactions as Investment then short term capital gains will be taxable @15 % and long term capital gains will be taxable at 10%.

If you count it as your Trading Activity then the profit arising on sale of shares will be added to the business income and it will be taxed at the applicable rates to the assessee which can be maximum 30% plus applicable surcharge and CESS.

If you count the profits as capital gains you will not be allowed any expense as deduction except expenses incurred in connection with transfer like brokerage, GST turnover charges etc.

In case of business income these expenses will be allowed as deduction:

  1. Brokerage, Turnover charges, GST, Stamp duty, STT, etc. incurred to undertake sale/purchase transactions.
  2. Telephone / Internet, etc. expenses incurred for business.
  3. Salary of employees
  4. Consultant’s fees, newspaper fees, magazine expenses.
  5. Any other office expense.

3. Is maintenance of BoA mandatory in case of Business?

Whether you are into intraday transactions or derivative – F & O transactions or transactions with delivery in share market, you have to maintain BoA as per the applicable provisions of Income Tax Act, 1961.

When is TDS deducted from your dividend income?

W.E.F. 1st April, 2020, when the dividend income exceeds Rs. 5000 in a financial year the entire amount will be subject to TDS @ 10%.

♦ Can we submit form 15G / 15H for non-deduction of TDS on dividend income?

Yes, when your total income during a financial year is less than the basic exemption limit, then you can submit form 15G. Similarly if you are a senior citizen and your estimated tax liability for a FY is zero, then you can submit form 15H to the company and can avoid from the TDS liability.

Profits or losses from sale of unlisted equity shares.

On purchase or sale of unlisted shares STT is not levied.

First you need to decide the “period of holding” of shares.

If the holding period is less than or equal to 24 months then the gains or losses from such shares will be considered as short term capital gain or loss, however if the shares are sold after 24 months then the gain or loss will be considered as LTCG/LTCL.

What will be the rate of tax?

For LTCG the tax rate will be 20%.

Whereas the STCG will be included with your other income and tax will be calculated on the basis of applicable tax rates.

Tax Planning in case of Investment in shares?

  1. Opening a DEMAT account of one person by opening it in the name of all adult members in a family the LTCG or STCG can be distributed between the members of the family and by taking the benefit of basic exemption limit for each Individual, the tax liability in case of Short Term Capital Gains @ 15% or LTCG @ 10% on one person can be decreased.
  2. If the equity shares are held for a period of more than 12 months then LTCG to the extent of Rs. 1 lac is fully exempt, whereas on the amount exceeding Rs. 1 lac tax will be collected @ 10% .
  3. If equity shares are held for a period of less than 12 months the STCG will be taxed @ 15%.
  4. What if you incur short term or long term capital loss on sale of shares?

The LTCL happened during a financial year can be set off against long term capital gains for that financial year.

If there is a LTCG of Rs. 2,00,000 and a LTCG of Rs. 1,00,000 during a FY then this loss can be set off against the gains and Net Rs. 1,00,000 ( Rs. 2 lacs– Rs. 1 lac) will be considered as your income from capital gains. The short term capital loss for a FY can be set off against LTCG or STCG of that year.

  • The short term or long term capital losses for a year if cannot be set off against the gains for the said year then such losses can be carried forward for eight years and can be set off against respective gains for that years.
  • Open DEMAT account in the name of Hindu Undivided Family. According to the Income Tax Act, 1961 HUF is considered as a separate legal entity. The assessment of Income of HUF is done separately from their members. That means basic exemption limit of 2.5 lacs is available to HUF separately.

Tax planning can also be done by forming an HUF and opening a demat account in their name.

  • W.E.F. 1st April, 2020 the dividend declared by a company will be taxable in the hands of shareholder.

According to the section 194 the company will deduct TDS at the rate of 10% if the dividend amount exceeds five thousands. This TDS can be claimed against your tax liability at the time of filing ITR. If your income is not subject to tax then according to the relevant rules you can file form 15G / 15H.

Benefit of Basic Exemption Limit:

Against long term capital gains or short term capital gains  you will be not be liable to get the deductions u/s 80C to 80U , however you will be eligible to avail the basic exemption limit benefits.

Age Limit            Basic Exemption limit (Rs.)
80 yrs. or above – for Super Senior Citizen           5,00,000
60 yrs. or above – for Senior Citizen        3,00,000
Below 60 yrs. ( including HUF )  2,50,000

♦ File your ITR on Time:

According to the Income Tax Act, 1961, if your Total Income exceeds the basic exemption then you will have to file the ITR mandatorily.

Whereas, a partnership firm, company, LLP, Co-operative society has to mandatorily file ITR irrespective of their Income.

♦ What is the due date to file ITR for F.Y 20-21?

Generally, the due date to file Income Tax Return for a Salaried Employee, Investors, and Persons carrying on Business (Not liable to Tax Audit) is 31st July of the next FY.

Whereas in case of a company and for all persons liable to audit under any law, the due date to file ITR will be 31st Oct.

Due to Covid-19 in India the due date to file ITR for the F.Y. 2020-21 has been extended as below:

PersonsDue Date for F.Y 20-21
Salaried Employee, Investors ,Persons carrying on 
Business ( Not liable to Tax Audit )   
31st  Dec ,2021
Company and for all persons liable to audit under
any law ( Societies, Trusts, assesses liable to  Tax Audit )   
15th  Feb,2022