TaxabilityTaxability ofof CapitalCapital MarketMarket transactionstransactions SunilSunil AroraArora M.Com., F.C.A. IncomeIncome fromfrom capitalcapital marketmarket Shares Business Investment Trading Speculation Capital gains Taxable at normal Section 43(5) Short / long term rates STT u/s 88E STT u/s 88E Exemptions / tax rates Treatment of loss StatutoryStatutory provisionsprovisions BusinessBusiness F&OF&O STTSTT DividendDividend ExpenditureExpenditure forfor earningearning dividenddividend SecuritiesSecurities TransactionTransaction TaxTax SectionSection 88E88E IncomeIncome fromfrom taxabletaxable securitiessecurities transactionstransactions chargeablechargeable toto taxtax underunder thethe headhead ‘‘ProfitProfit && gainsgains fromfrom businessbusiness && professionprofession’’ STTSTT allowedallowed asas aa deductiondeduction fromfrom taxtax payablepayable onon suchsuch incomeincome TaxTax payablepayable onon suchsuch incomeincome toto bebe calculatedcalculated byby applyingapplying averageaverage raterate ofof incomeincome taxtax onon suchsuch incomeincome EffectEffect ofof SectionSection 88E88E SchemeScheme beneficialbeneficial forfor assesseesassessees inin higherhigher taxtax bracketbracket NoNo deductiondeduction inin casecase ofof lossloss oror incomeincome belowbelow taxabletaxable limitslimits LossLoss ofof STTSTT paid:paid: IncomeIncome fromfrom taxabletaxable securities:securities: Rs5.00Rs5.00 lacslacs STTSTT paidpaid :: Rs3.00Rs3.00 lacslacs AverageAverage raterate ofof taxtax :: 25%25% RebateRebate ofof STTSTT restrictedrestricted toto :: Rs1.25Rs1.25 lacslacs SpeculativeSpeculative transactiontransaction WhatWhat isis aa speculativespeculative transactiontransaction HowHow itit constitutesconstitutes aa separateseparate businessbusiness TaxabilityTaxability ofof gaingain TreatmentTreatment ofof lossloss STTSTT SpeculativeSpeculative transactionstransactions SectionSection 43(5):43(5): ““SpeculativeSpeculative transactiontransaction”” meansmeans aa transactiontransaction inin whichwhich aa contractcontract forfor purchasepurchase oror salesale ofof commodity,commodity, includingincluding stocksstocks andand shares,shares, isis periodicallyperiodically oror ultimatelyultimately settledsettled otherwiseotherwise thanthan byby thethe actualactual deliverydelivery oror transfertransfer ofof thethe commoditycommodity oror scripsscrips UnlessUnless thethe transactiontransaction settledsettled byby actualactual deliverydelivery oror transfer,transfer, itit willwill bebe aa speculativespeculative transaction.transaction. Jute Investment Co. AIR 1980 SC 483 TransactionTransaction speculativespeculative forfor thethe purposepurpose ofof sectionsection 43(5)43(5) eveneven ifif intentionintention toto taketake actualactual deliverydelivery couldcould notnot bebe effectuatedeffectuated M.R. Dhawan v. CIT (1979) 119 ITR 412 (Delhi) SpeculativeSpeculative transactionstransactions ExceptionsExceptions providedprovided byby thethe proviso:proviso: – A contract in respect of RM or merchandise to safe guard from loss due to future price fluctuations in respect of actual delivery – A contract in respect of stocks & shares entered into by a dealer or investor to guard against loss in holding of stocks & shares – A contract entered into by a member of a forward market or a stock exchange in the course of any transaction in the nature of jobbing or arbitrage to guard against loss in the ordinary course of his business SpeculativeSpeculative transactionstransactions Proviso (d) inserted by F.Act, 2005 wef 1-4-2006 Trading in derivatives not a speculative transaction: – Derivatives referred to in section 2(ac) of the Securities Contracts (Regulation) Act,1956 – carried out in a recognised stock exchange – electronically on a screen based system – through a broker or a sub-broker registered u/s 12 of SEBI – supported by a time stamped contract note – containing client identity no. & PAN no. Treatment of unabsorbed brought forward loss from trading in derivatives? TreatmentTreatment ofof speculationspeculation lossloss SectionSection 7373 LossLoss fromfrom speculationspeculation businessbusiness cancan bebe setset offoff againstagainst profitsprofits && gainsgains ofof anotheranother speculationspeculation businessbusiness UnabsorbedUnabsorbed lossloss cancan bebe carriedcarried forwardforward forfor maximummaximum uptoupto 44 AYAY succeedingsucceeding thethe yearyear ofof lossloss SpeculationSpeculation businessbusiness ExplanationExplanation 22 toto SectionSection 2828:: WhereWhere speculativespeculative transactiontransaction carriedcarried onon byby anan assesseeassessee areare ofof suchsuch aa naturenature asas toto constituteconstitute aa business,business, thethe businessbusiness shallshall bebe deemeddeemed toto bebe distinctdistinct andand separateseparate fromfrom anyany otherother business.business. ShareShare brokerbroker carryingcarrying outout selfself tradingtrading ofof thethe naturenature ofof speculativespeculative transactions?transactions? ManufacturingManufacturing companycompany carryingcarrying onon tradingtrading ofof sharesshares ofof otherother companies?companies? SpeculationSpeculation businessbusiness Explanation to section 73 Business of a company consists of purchase & sale of shares of other companies: – For the purpose of set off and carry forward of loss – Deemed to be carrying speculation business to the extent of such business of purchase & sale of shares Exceptions : – Companies whose gross total income consists mainly of income chargeable under the head “Interest on securities”, “Income from house property”, “Capital gains” & “Income from other sources” – Companies carrying on banking business or granting of loans & advances ExplanationExplanation toto sectionsection 7373 ImplicationImplication AppliesApplies onlyonly toto companiescompanies LossLoss fromfrom tradingtrading inin sharesshares cannotcannot bebe setset offoff againstagainst incomeincome fromfrom otherother businessbusiness && professionprofession SharesShares heldheld asas capitalcapital assetasset PeriodPeriod ofof holdingholding ExemptionsExemptions RatesRates ofof taxestaxes SpecialSpecial provisionsprovisions LongLong termterm capitalcapital assetasset Held for more than 12 months in the case of: – Shares held in a company – Securities listed in a recognised stock exchange in India – Units of UTI – Units of a mutual fund specified u/s 10(23D) – Zero coupon bonds Period to be considered from date of allotment for: – Shares – Rights issue – Bonus shares For right to subscribe from the date of offer Date of broker’s note in case acquired from stock exchange In case of several lots FIFO to be followed: Circular No. 704 dt 28-4-95 EquityEquity sharesshares SectionSection 1010 (36)(36) BSEBSE 500500 indexindex SharesShares acquiredacquired betweenbetween 11--33--20032003 && 2929--22--20042004 TransferredTransferred afterafter 1212 monthsmonths throughthrough aa recognisedrecognised stockstock exchangeexchange CapitalCapital gainsgains notnot chargeablechargeable toto taxtax ExemptionExemption hashas becomebecome redundantredundant afterafter introductionintroduction ofof sectionsection 1010 (38)(38) EquityEquity sharesshares Section 10(38) Long term capital gains arising from: – Equity shares in a company – Units of an equity oriented fund Exempt from tax, provided transaction of sale is entered into after the date of application of chapter VII. (1-10-2004) STT has been paid on the said transaction Exemption available to all assessee Long term capital asset Similar conditions for short term capital assets for reduced rate of tax of 10% u/s 111A CapitalCapital gainsgains exemptexempt fromfrom taxtax CapitalCapital gainsgains notnot chargeablechargeable toto taxtax byby virtuevirtue ofof sectionsection 1010 ofof thethe Act.Act. InIn casecase assetsassets areare transferredtransferred atat aa loss?loss? CITCIT v.v. S.S.S.S. ThiagarjanThiagarjan 129129 ITRITR 115115 (Mad.)(Mad.) RamjilalRamjilal RaisRais v.v. CITCIT 5858 ITRITR 181181 (All.)(All.) RateRate ofof taxtax onon LTCGLTCG SectionSection 112112 TaxTax @@ 20%20% ProvisoProviso forfor taxtax toto bebe restrictedrestricted toto 10%10% withoutwithout indexationindexation benefitbenefit inin casecase ofof listedlisted securities,securities, etcetc UnutilisedUnutilised exemptionexemption limitlimit cancan bebe availedavailed NoNo deductiondeduction underunder ChapterChapter VIAVIA NoNo rebaterebate u/su/s 8888 RebateRebate u/su/s 88B88B && 88C88C areare allowedallowed fromfrom thethe taxtax TaxTax onon shortshort termterm capitalcapital gainsgains fromfrom shares,shares, etcetc SectionSection 111A111A TaxTax @@ 10%10% onon shortshort termterm capitalcapital gainsgains of:of: – Equity shares – Units of an equity oriented funds ReducedReduced raterate onlyonly inin casecase STTSTT paidpaid onon thethe trftrf ofof suchsuch sharesshares UnutilisedUnutilised basicbasic exemptionexemption limitlimit cancan bebe availedavailed NoNo deductiondeduction underunder ChapterChapter VIAVIA NoNo rebaterebate u/su/s 8888 RebateRebate u/su/s 88B88B && 88C88C areare allowedallowed fromfrom thethe taxtax CostCost ofof acquisitionacquisition ofof sharesshares SectionSection 5555 CostCost ofof acquisitionacquisition ofof shares:shares: –– RightsRights issueissue –– BonusBonus sharesshares –– RightsRights renouncedrenounced –– AcquisitionAcquisition ofof rightright renouncedrenounced andand subscriptionsubscription toto thethe rightsrights