How income from stocks and mutual funds is taxed for an individual

This tax treatment on LTCG was reintroduced by Finance Act 2018 with effect from financial year 2018-19. It is pertinent to note that such LTCG have been grandfathered upto 31 January 2018. In other words, the cost of acquisition of a listed equity share or a unit of an equity oriented fund acquired on or before 31 January 2018 will be the actual cost. However, if the actual cost is less than the prescribed fair market value (FMV) of such asset as on 31 January 2018, then such prescribed FMV will be considered as the cost of acquisition. Further, if the sale consideration on transfer is less than the FMV, then such sale consideration or the actual cost, whichever is higher, will be deemed to be the cost of acquisition.

This can be better understood with the help of illustrations below as per the extract of Frequently Asked Questions (dated 4 February 2018) released by Central Board of Direct Taxes on LTCG taxation:

Illustration 1 – An equity share is acquired on January 1, 2017 at Rs 100, its fair market value is Rs 200 on January 31, 2018 and it is sold on April 1, 2018 at Rs 250.

As the actual cost of acquisition is less than the fair market value as on January 31, 2018, the fair market value of Rs 200 will be taken as the cost of acquisition and the LTCG will be Rs 50 (Rs 250 – 200).

Illustration 2 – An equity share is acquired on January 1, 2017 at Rs 100, its fair market value is Rs 200 on January 31, 2018 and it is sold on April 1, 2018 at Rs 150.

In this case, the actual cost of acquisition is less than the fair market value as on January 31, 2018. However, the sale value is also less than the fair market value as on January 31, 2018. Accordingly, the sale value of Rs 150 will be taken as the cost of acquisition and the LTCG will be NIL (Rs 150 – 150).

Illustration 3 – An equity share is acquired on January 1, 2017 at Rs 100, its fair market value is Rs 50 on January 31, 2018 and it is sold on April 1, 2018 at Rs 150.

In this case, the fair market value as on January 31, 2018 is less than the actual cost of acquisition, and therefore, the actual cost of Rs 100 will be taken as actual cost of acquisition and the LTCG will be Rs 50 (Rs 150 – 100).

Illustration 4 – An equity share is acquired on 1 January 2017 at INR100, its fair market value is INR 200 on 31 January 2018 and it is sold on 1 April 2018 at INR 50.

In this case, the actual cost of acquisition is less than the fair market value as on 31 January 2018. The sale value is less than the fair market value as on 31 January 2018 and also the actual cost of acquisition. Therefore, the actual cost of INR 100 will be taken as the cost of acquisition in this case. Hence, the long-term capital loss will be INR 50 (INR 50 – 100) in this case.

For shares allotted by an Indian listed company to their employees under Employee Stock Option Plan/ equity incentive plan, certain aspects of grandfathering implications should be examined for computing capital gains tax liability.

Dividend income paid by a domestic company to a resident individual is taxable in the hands of such individual at the rate of 10 per cent (plus applicable surcharge and cess) on the dividend exceeding INR 10 lakh in aggregate during a particular financial year.

Dividend income received from an equity oriented mutual fund is exempt from tax in the hands of an individual.

With reference to investment in mutual fund, certain tax saving mutual funds schemes (i.e. equity linked savings schemes) are eligible for a deduction under section 80C of the Act within the overall limit of INR1.5 lakh per annum, subject to fulfillment of specified conditions.

Unlisted shares

Capital gains from transfer of unlisted share are considered as STCG where period of holding is less than or equal to 24 months, and LTCG when holding period is more than 24 months. STCG arising from an unlisted share are taxable as per income-tax slabs applicable to the relevant individual. LTCG arising from an unlisted share to a resident individual are taxable at the rate of 20 per cent (with indexation benefit) (plus applicable surcharge and cess). Concessional rate of tax of 10 per cent (plus applicable surcharge and cess) is applicable to non-resident taxpayer without indexation benefit.

In case of a sale/transfer of an unlisted share, it is worthwhile to note that if the sale consideration received is less than the prescribed FMV, then such FMV would be deemed to be the sale value for the purpose of computing capital gains in the hands of the transferor. At the same time, tax implications of such transaction in the hands of transferee under the head ‘Income from other sources’ should be examined separately, subject to specified conditions/limits.

Debt mutual fund

Capital gains arising from transfer of a unit of a debt mutual fund period of holding of 36 months is relevant for classification of gains as STCG or LTCG vis-à-vis 12 months applicable to listed equity share and unit of an equity oriented mutual fund and 24 months applicable to unlisted share. The taxability of STCG and LTCG arising from transfer of a debt mutual fund unit is akin to an unlisted share as enumerated above. Dividend income received from a debt mutual fund is exempt in the hands of an individual.

To summarise, the tax implications in respect of capital gains/income from shares and mutual funds have undergone significant amendment in the past few years which should be considered (including eligible exemption available against long-term capital gains tax) besides financial prudence before making an investment decision.

The author is Partner and Head, Global Mobility Services-Tax, KPMG in India.