Tax on IPO – Initial Public Offering

What is an IPO?

An initial public offering (IPO) refers to the process of offering shares of a private corporation to the public in a new stock issuance. IPOs allow a company to raise capital from public investors. The transition from a private to a public company can be an important time for private investors to fully realize gains from their investment as it typically includes share premiums for current private investors. Meanwhile, it also allows public investors to participate in the offering. We will be taking a close look at tax that an IPO would attract.

Why does a Company go Public?

  • To raise capital for growth and expansion:
    • Every company needs money to increase its operations, create new products or pay off existing debts. Going public is a great way to gain this much-needed capital for a company
  • Allowing owners and early investors to sell their stake to make money:
    • It is also seen as an exit strategy for initial investors and venture capitalists. A company becomes liquid through the sale of stocks in an IPO. Venture capitalists sell their stock in the company at this time to reap returns and exit from the company
  • Greater public awareness:
    • IPOs are ‘star-marked’ in the stock market calendar. There is a lot of buzz and publicity around these events. This is a great way for a company to publicize its products and services to a new set of customers in the market

Process of Applying for an IPO?

  • The Securities and Exchange Board (SEBI) that regulates the process of an IPO and companies hoping to issue shares through an IPO have to first register with SEBI
  • The company must submit necessary documents with SEBI which is analyzed and approved by the same governing body
  • While SEBI evaluates the application, the company should prepare its prospectus
  • On receiving the approval from SEBI, the company has to determine the share price of the shares to be issued and disclose the number of shares it plans to issue
  • The company must decide between the two types of IPO issues
  • Fixed Price IPO is one where the company decides in advance the price of the shares
  • Book Building IPO is where the company provides a range of prices and there is a bid for shares within that price range
  • The shares are made public once the company decides the type of IPO they go ahead with. The interested investors submit their applications and once the company receives the subscriptions from the public, it allots the shares
  • Finally, the company is listed on the stock market and post the issuance in the primary market, it gets listed in the secondary market. These are then open for trading on a daily business

Tax on IPO

If you are allotted shares via an IPO and you sell these shares on or before 12 months of holding, the gain (difference between the sale price and issue price) will be liable to be charged under the head ‘short term capital gain‘. The rate of tax on such gain is a special rate of 15%. The tax will be payable if your total income from all the sources (including capital gain) computed under the provisions of the income tax exceeds INR 2,50,000 (higher slab limits in the case of senior citizens).


If the allotted shares are sold after being held for more than 12 months, the gain will be charged as Long Term Capital Gains. Section 112A with a 10% tax on LTCG in excess of INR 1 lakh will be applicable in the case of a long term capital asset on which STT is paid. The new Section 112A is applicable from FY 2018-19 (AY 2019-20).

List of IPO for the Year 2021

Issuer Company Exchange Open Close Lot Size Issue Price (Rs) Issue Size (Rs Cr)
Tatva Chintan Pharma Chem Ltd IPO BSE, NSE Jul 16, 2021 Jul 20, 2021 13 1073 to 1083 500
Zomato Limited IPO BSE, NSE Jul 14, 2021 Jul 16, 2021 195 72 to 76 9375
Clean Science and Technology Ltd IPO BSE, NSE Jul 07, 2021 Jul 09, 2021 16 880 to 900 1546.62
G R Infraprojects Limited IPO BSE, NSE Jul 07, 2021 Jul 09, 2021 17 828 to 837 963.28
India Pesticides Limited IPO BSE, NSE Jun 23, 2021 Jun 25, 2021 50 296 800
Krishna Institute of Medical Sciences Limited IPO BSE, NSE Jun 16, 2021 Jun 18, 2021 18 825 2143.74
Dodla Dairy Limited IPO BSE, NSE Jun 16, 2021 Jun 18, 2021 35 428 520.18
Sona BLW Precision Forgings Limited IPO BSE, NSE Jun 14, 2021 Jun 16, 2021 51 291 5550
Shyam Metalics and Energy Limited IPO BSE, NSE Jun 14, 2021 Jun 16, 2021 45 306 909
Ruchi Soya Industries Ltd FPO BSE, NSE         0.04
POWERGRID Infrastructure Investment Trust InvIT BSE, NSE Apr 29, 2021 May 03, 2021 1100 100 7734.99
Macrotech Developers Limited IPO BSE, NSE Apr 07, 2021 Apr 09, 2021 30 486 2500
Barbeque Nation Hospitality Limited IPO BSE, NSE Mar 24, 2021 Mar 26, 2021 30 500 452.87
Suryoday Small Finance Bank Ltd IPO BSE, NSE Mar 17, 2021 Mar 19, 2021 49 305 582.34
Nazara Technologies Limited IPO BSE, NSE Mar 17, 2021 Mar 19, 2021 13 1101 582.91
Kalyan Jewellers India Limited IPO BSE, NSE Mar 16, 2021 Mar 18, 2021 172 87 1175
Laxmi Organic Industries Limited IPO BSE, NSE Mar 15, 2021 Mar 17, 2021 115 130 600
Craftsman Automation Limited IPO BSE, NSE Mar 15, 2021 Mar 17, 2021 10 1490 823.7
Anupam Rasayan India Limited IPO BSE, NSE Mar 12, 2021 Mar 16, 2021 27 555 760
Easy Trip Planners Limited IPO BSE, NSE Mar 08, 2021 Mar 10, 2021 80 187 510
MTAR Technologies Limited IPO BSE, NSE Mar 03, 2021 Mar 05, 2021 26 575 596.41
Heranba Industries Limited IPO BSE, NSE Feb 23, 2021 Feb 25, 2021 23 627 625.24
RailTel Corporation of India Limited IPO BSE, NSE Feb 16, 2021 Feb 18, 2021 155 94 819.24
Nureca Limited IPO BSE, NSE Feb 15, 2021 Feb 17, 2021 35 400 100
Brookfield India Real Estate Trust REIT BSE, NSE Feb 03, 2021 Feb 05, 2021 200 275 3800
Stove Kraft Limited IPO BSE, NSE Jan 25, 2021 Jan 28, 2021 38 385 412.63
Home First Finance Company India Ltd. IPO BSE, NSE Jan 21, 2021 Jan 25, 2021 28 518 1153.72
Indigo Paints Limited IPO BSE, NSE Jan 20, 2021 Jan 22, 2021 10 1490 1176
Indian Railway Finance Corporation Limited IPO BSE, NSE Jan 18, 2021 Jan 20, 2021 575 26 4633.38
Glenmark Life Sciences Limited IPO BSE, NSE

FAQs

Is an IPO a taxable event?

The Initial Public Offering does not trigger any taxation. Taxes only apply when you sell the shares. Any gains over your cost-basis are taxed as capital gains.

How long after IPO can you sell?

The IPO is a bit of a hurry-up-and-wait, as employees usually can’t sell their stock for up to 180 days. This is called a lock-up period, and is meant to prevent employees from all dumping their stock and depressing the stock price.

Fund of Funds – Meaning, Types and Benefits

When an individual invests in fund of funds they at once get the benefit of a diversified investment portfolio. Investing in fund of funds gives investors exposure to various asset classes that too at a lower risk. This article will help you understand various aspects related to funds of funds.

What is Fund of Funds?

A fund of funds also known as a multi-manager investment is a pooled investment fund that invests in other types of funds. In simpler terms, a fund of funds is a mutual fund that invests in various other mutual funds present in the market.

The most important feature of these types of mutual funds is that these funds are managed by highly trained professional portfolio managers who can accurately predict the market condition to minimize the chances of loss. Fund of funds are mutual funds that have different kind of portfolio depending upon the main aim of the fund manager. For example, if the aim is to earn higher returns and yields, then the target will be mutual funds that have higher NAV. Similarly, if the aim is stability, then mutual funds that are low-risk will be the target.

These fund of funds mutual funds can invest in both domestic and international funds. This gives them the benefit of diversification and helps in improving the yield of the fund.

Types of Fund of Funds

Following are the various type of fund of funds prevailing in India:

Asset Allocation Funds

Asset Allocation Funds are balanced mutual funds where the investment is done in diverse securities like equity, debt, gold, etc. Investing in a diverse asset pool helps the asset allocation funds to perform better and generate higher returns at a low-risk level.  

Gold Funds

In gold funds, the fund of funds invests in mutual funds that are primarily trading in gold securities. Depending upon the asset management company, this category of fund of funds can invest in mutual funds or gold trading companies directly.

International Fund of Funds

International fund of funds is those funds that invest in mutual funds that are operating in foreign countries. These funds allow the investors to yield higher returns via the best-performing stocks and bonds of different countries.

Multi Manager Fund of Funds

The most common type of fund of funds is a multi-manager fund of funds. These funds include various professionally managed Mutual Funds having a different portfolio concentration. Such fund of funds has more than one manager, with each handling a specific asset of their expertise.

ETF Fund of Funds

ETF fund of funds are mutual funds that invest in shares in the stock market making it a higher risk fund as they are subject to market risk. If one wants to invest directly invest in ETFs they require a Demat trading account while investing in ETF fund of funds have no such limitations. Hence, investing in an ETF via a fund of funds is a more sought out option than a direct investment in this instrument.  

Advantages of Fund of Funds

There are several benefits of investing in Fund of Funds;

High Diversification

Fund of funds gives the opportunity to a higher degree of diversification as these funds invest in multiple schemes that in turn invest their corpus in various underlying assets.

Low Investment Amount

The amount of investment in a fund of funds is less as compared to other investment instruments. Hence, investors with limited finance can also benefit from multiple assets under the same roof.

Experience Fund Managers

Fund of funds mutual fund schemes is managed by highly professional personnel who perform thorough market research to yield higher returns.

Drawbacks of Fund of Funds

Following are the limitations of investing in fund of funds;

High Expense Ratio

Just like any other mutual funds, a fund of funds also incurs expenses. However, unlike funds of funds incur additional costs. Apart from the usual management and administrative expenses, they also have to incur costs of the underlying funds that they invest in.

Tax Implication

Tax will be levied on the fund of funds during the time of redemption of the principal amount. Fund of funds will attract long-term or short-term capital gains as per the holding period of the funds. It is to be noted that the dividend received on this investment is not taxable, as the burden is borne by the issuing fund house.

Difference between ETF and Fund of Funds

Category Fund of Funds ETF
NAV vs Market Value Units of FOF are bought or redeemed at NAV ETF is traded on a stock exchange at the Market price of each lot of share or fund 
Expense Ratio  High Low
Liquidity Might take few hours to days to get the money Bettter liquidity compared to FOF 
Taxation FOF are taxed same as Debt Funds ETFs are taxed as per their asset allocation

Tax Implications for Indian Residents having Income from Investment in US Equity Market

If a person resident in India has invested in shares listed in the US equity market he will receive income from such investment in form of capital gains and dividends and therefore would be liable to pay tax. Income from those investments will be foreign income.

Since the income is from US, the investor has to pay the taxes in the US, and also because the investor is resident in India he will have to declare the foreign income in his ITR and pay taxes on it. If the investor wishes to avoid this double taxation it is very important to understand the tax treatment of foreign income.

What are the Tax Implications?

There are two types of taxes that can be levied on income form foreign equity shares:

  1. Tax on Dividends
  2. Capital Gains Tax

Tax on US Equity Dividends

Taxability of dividends in US: Income from investments received as dividend is taxable in US. It is taxable at a flat rate of 25%. For example, If a company declares 100$ as a dividend, an investor receives 75$, and 25$ will be withheld as an amount of tax.

Taxability of dividends in India: Dividend received from a Foreign Company is taxable income under the head Income From Other Sources at slab rates. If the assessee incurs the expense of remuneration or commission for the purpose of earning the dividend, he/she can claim it as an expense from dividend income.

However, India and the USA have a Double Taxation Avoidance Agreement (DTAA) that allows using the tax withheld in the US as a foreign tax credit to reduce the tax liability in India.

Therefore, if we consider the above example here, the tax liability in India would be calculated at $100. Suppose the tax liability in India is $27. Since the investor had already paid $25 in the US, he will have to pay only $3 in India.

Further, the rate of exchange for the calculation of dividend in rupees shall be the telegraphic transfer buying rate of such currency as on the last day of the month immediately preceding the month in which the company declares a dividend.

Capital Gains Tax on US Equity

Taxability of capital gains in US: When an investor earns capital gains on the sale of foreign shares there is no tax applicable in US.

Taxability of capital gains in India: Income from the sale of foreign shares is a Capital Gains Income as per the Income Tax Act and also it is taxable in India.

Tax on US equity capital gains in India depends on the period of holding of investment. If an investor sells an unlisted stock held for more than 24 months, gain or loss on such sales is a Long Term Capital Gain (LTCG) or Long Term Capital Loss (LTCL). However, If an investor sells an unlisted stock held for up to 24 months, gain or loss on such sale is a Short Term Capital Gain (STCG) or Short Term Capital Loss (STCL).

Moreover, If an investor has long-term capital gain it is taxable at a flat rate of 20% (after indexation benefit) and if an investor has short-term capital gain it is taxable at applicable slab rates.

Further, the rate of exchange for the calculation of capital gains in rupees shall be the telegraphic transfer buying rate of such currency as on the last day of the month immediately preceding the month in which the capital asset is transferred.

You can refer to this table below to understand the taxability of income in hands of resident Indian

Country Dividends Capital Gains
India Taxable Taxable
US Taxable Not Taxable

Disclosure in ITR

Apart from tax implications, an obligation to file a tax return in India also arises. The assessee has to furnish the complete details. In the case of individuals, having regard to the nature of income they can file ITR 2 (in case there is no business or professional income) or ITR 3 (in case there is business or professional income). 

Moreover, Assessee needs to disclose dividend in Schedule OS i.e Income from other sources, in case income is taxable at normal tax rates also in Schedule SI i.e Income chargeable to tax at special rates, if such income is taxable at special rates.

Details of income by way of capital gains need to be furnished in Schedule CG i.e Capital Gains depending on its nature (Short term or long-term). Further information is required to be furnished in Schedule SI, Income chargeable to tax at special rates, in case such income is taxable at special rates.

Further, If any resident is holding investments then such disclosure is mandatory in schedule FA i.e. Foreign Assets.

Furthermore, If resident is claiming any foreign tax credit then such disclosure is mandatory in schedule TR i.e. Taxes paid outside India.

FAQs

How to claim foreign tax credit?

Investor needs to file form 67 on Income tax e-filing website to claim foreign tax credit.

How do I report income from sale of shares of Foreign Company in the Income Tax Return?

The investor should file ITR-2/ITR-3 and report income from the sale of Foreign Shares as Capital Gains.
Tax on sale of Foreign Shares is as follows:
LTCG – 20% without indexation
STCG – slab rates
Moreover, the investor shall declare details of Foreign Shares should in Schedule FA i.e. Schedule Foreign Assets of the ITR.

Is it mandatory to disclose foreign assets ITR?

Yes it is mandatory to to disclose foreign assets ITR.

How many methods are there to claim DTAA tax relief?

There are two methods to claim DTAA tax relief – exemption method and tax credit method.
– By exemption method, income is taxable in one country and exempt in another.
– In the tax credit method, where the income is taxable in both countries, tax relief is available in the country of residence.

I am an NRI. Do I need to pay tax in India on Income from Investment in US Equity Market?

No, If you are an NRI you need not to pay any tax in India on Income from Investment in US Equity Market in India.

Is it mandatory to file form 67 for claiming tax credit?

Yes it is mandatory to file form 67 for claiming tax credit.

Which rate of conversion I should use to convert capital gains amount in rupees?

It shall be the TTBR rate of such currency as on the last day of the previous month in which the capital asset is transferred.

Corporate Actions – Meaning & Taxation

When a company issues a corporate action, it has a direct effect on the securities issued by that company. If an individual holds stocks in such a company or is a potential investor then it becomes essential to understand how will a corporate action affect the company. This article will give a clearer idea of some common types of corporate actions and how they can affect shareholders.

What is Corporate Action?

A corporate action is an activity that brings material change to an organization and impacts its stakeholders that includes the shareholders of the firm. A corporate action is initiated by the board of directors and approved by the shareholder of the firm.

Corporate Actions For Equity Shareholders

‌Income Tax on Buy Back of Shares

‌A buyback is a company’s method to invest in itself by buying shares from other investors in the market. Buybacks reduce the number of shares outstanding in the market. However, the buyback of shares is an important corporate restructuring method.‌

The company buys back shares from existing shareholders at an issue price. Thus, an existing shareholder sells shares to the company at the issue price.‌

Example:

Listed company ABC Ltd repurchased 1,000 shares at the market price of INR 700 and issue price of INR 100.‌

  • Unlisted Companies Exempt from tax in the hands of the investor since FY 2013-14
  • Listed Companies: Up to 05/07/2019 Buy-Back of Shares is treated as a sale of shares and thus capital gains income in hands of the investor. LTCG is taxed at 10% in excess of INR 1 lac under Sec 112A STCG is taxed at 15% under Sec 111A. After 05/07/2019 Buy-Back of Shares is treated as a sale of shares and thus capital gain income in hands of the investor. LTCG & STCG are both Exempt Income for the investor since the company pays buyback tax at 20%.

‌Corporate Actions for Dividend

‌A dividend payout is when the company shares its profit with the shareholders. It can be in the form of cash or stock, which is issued at a specified interval of time i.e. quarterly, semi-annually, or yearly.‌

Income Tax for Dividend

  • Dividend from Foreign Company: Such dividend is taxable at Slab Rates under the head IFOS (Income From Other Sources)
  • Dividend from Domestic Company: Up to FY 2019-20, this was exempt up to INR 10 lacs. FY 2020-21 Onwards, this dividend is taxable at Slab Rates under the head IFOS. TDS under Section 194 is deducted at the rate of 10% if the aggregate dividend during the financial year exceeds INR 5000. If the payee does not provide the PAN, TDS shall be deducted at the rate of 20%.
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Corporate Action for Dividend on Preference Shares

Dividend on preference shares is the dividend distributed by a Company on each preference share held by the investor. ‌

Income Tax on Dividend on Preference Shares

  • Dividend from Foreign Company: Such dividend is taxable at Slab Rates under the head IFOS (Income From Other Sources)
  • Dividend from Domestic Company: Up to FY 2019-20, this was exempt up to INR 10 lacs. FY 2020-21 onwards dividend on preference shares held by customers is taxable at Slab Rates under the head IFOS. TDS under Section 194 is deducted at the rate of 10% if the aggregate dividend during the financial year exceeds INR 5000. If the payee does not provide the PAN, TDS shall be deducted at the rate of 20%.

Corporate Action for Amalgamation

An amalgamation is the combination of two or more companies into a larger single company.‌

  • Mergers (one survivor) – purchasing company buys the selling company’s assets
  • Acquisition (two survivors) – purchasing company acquires more than 50% of the shares of the acquired company

Example:‌

Under the Merger of IDFC Bank and Capital First, Akash had purchased 10 shares of Capital First in 2011 and is still holding the stock. The companies have agreed to a swap ratio of 139:10. Hence, Akash will get 139 shares of IDFC Bank in exchange for his 10 Capital First shares.‌

Income Tax for Amalgamation

Issue of new shares in exchange for old shares is not treated as a transfer and is thus not taxable.‌

  • Sale of Shares of New Company: LTCG is taxed at 10% in excess of INR 1 lac under Sec 112A. STCG is taxed at 15% under Sec 111A. Cost of Acquisition = Original Purchase Price * Quantity. The benefit of grandfathering scheme is not available for new shares received in exchange for old shares. Thus, the Grandfathering Rule as per Sec 112A does not apply even if the new shares were allotted before 31st January 2018.
  • Sale of Shares of Old Company: LTCG is taxed at 10% in excess of INR 1 lac under Sec 112A and STCG is taxed at 15% u/s 111A. Grandfathering Rule as per Sec 112A applies if the new shares were allotted before 31st January 2018.

Corporate Action for Bonus Issue

Company issues Bonus Shares to existing shareholders as an alternative to paying dividends. The company issues bonus shares to existing shareholders as on record date in a decided ratio‌.

Example:

Listed company ABC Ltd announces bonus issue of shares of 1:5. Thus, a shareholder will receive 5 new shares for each share held.‌

Income Tax on Bonus Issue

  • On the Issue of Bonus Shares: bonus shares at the time of issue are not taxable.
  • On Sale of Shares: LTCG is taxed at 10% in excess of INR 1 lac and STCG is taxed at 15%. The Period of Holding is calculated separately for original shares and bonus shares. The Capital Gains are calculated separately for original shares and bonus shares. The Cost of Acquisition in the case of Bonus Shares is NIL.

Corporate Action for Right Issue of Equity Shares

With an objective to raise fresh capital, company offers right shares to existing shareholders as on record date in a decided ratio.‌

Example:

Listed company XYZ Ltd announces a right issue of shares of 1:5 at an issue price of INR 200 with a market price of INR 350. Thus, a shareholder can buy 5 new shares at INR 200 for each share held.‌

Income Tax on Right Issue of Equity Shares

  • On Issue of Right Shares: The issue of right shares is not taxable.
  • On Sale of Shares: LTCG is taxed at 10% in excess of INR 1 lac and STCG is taxed at 15%. The period of holding is calculated separately for original shares and right shares. Capital Gains are calculated separately for original shares and right shares. Cost of Acquisition in the case of Right Shares is a price paid for acquiring the right shares. Amount paid to acquire the rights entitlement can be added to the purchase value to arrive at the total cost of the acquisition for computing capital gains.

Corporate Action for Spin Off

Spinoff refers to the dissolution of a subsidiary business entity from its parent company to form a new smaller independent organization. In a spinoff, a particular section of the parent company is separated from the main business. The spun-off company gets its own unique identity different from the parent company. In a spinoff, the existing shareholders of the parent company receive shares of the spin-off company as special dividends.‌

Example:‌

Shareholder has 100 shares of company A, Rs10 per share. Company A spins-off one of its divisions into Company B. Company A says that for each 10 shares of Company A that you own, you will be given 3 shares in Company B. It also says that Company B made up 30% of its total value so the value of Company A’s shares will be reduced by 30%.‌

Company A’s value becomes 700 post reduction and also gets Company B’s 30 shares (300 value) leading up to 1,000 (original value)‌

Income Tax on Spin Off

  • Spin-Off When the shareholders of the parent company are allotted the new shares in a resulting company after the spin-off, there would be no tax implication.
  • Sale of Shares: LTCG is taxed at 10% in excess of 1 lac and STCG at 15%. To calculate the Period of Holding for computing Capital Gains, the acquisition date of new shares would be the same as the acquisition date of original shares.

Corporate Action for Stock Split

Stock Split is a division in the shares of the company thus increasing the number of shares keeping the market cap the same.‌

Example:

Listed company XYA Ltd announces a stock split from INR 10 face value to INR 2 face value. Thus, a shareholder having one share of INR 10 face value would now hold 5 shares of INR 2 face value.‌

Income Tax on Stock Split

  • In Stock Split, the transaction of the stock split is not taxable.
  • Sale of Shares: LTCG is taxed at 10% in excess of 1 lac and STCG at 15%. To calculate the Period of Holding to compute Capital Gains, the acquisition date of split shares would be the same as the acquisition date of original shares To calculate Capital Gains, the Cost of Acquisition would be proportionately divided between the original and split shares.

FAQs

How will I know about any corporate action taken by the company?

The companies always communicate any corporate actions that they have taken to their shareholders. If one is not a shareholder, one can visit the official websites of NSE and BSE, and look at corporate announcements.

What is the meaning of voluntary and mandatory corporate action?

In a voluntary corporate action, shareholders have the choice to participate or not to. In a mandatory corporate action, shareholders have to compulsorily participate.

Market Linked Debentures – Tax Benefits and Risks

Market Linked Debentures are debentures where the pay-off is not defined as in a regular coupon-bearing debenture, but linked to the movement in another security or index such as NSE Nifty index or 10-year government security (G-sec) yield. For example, a 30-month MLD would pay the investor a pre-defined IRR at the end of the tenure if Nifty 50 Index does not fall by more than 75%. Market-Linked Investments may provide full or partial market downside protection and/or enhanced return potential.

Why Market Linked Debentures (MLD)?

A market-linked debenture does not pay any coupon before maturity. On maturity, apart from the initial principal component, there is a pay-off, i.e., a return payable. The advantage is that you are getting the exposure and upside in other markets such as equity (NSE Nifty) or G-sec, without taking as much of a risk as in investing directly into that asset.
If you invest directly in the Nifty or gold and Nifty or gold value declines over the investment horizon, you would lose a part of the principal.

Benefits of MLD

  • Market-linked debentures can be designed in various forms and can be structured to provide different objectives under different conditions.
  • Taxation of this instrument is efficient. These are listed on the exchanges and capital gains from listed debentures, after a holding period of more than one year, are taxable at 10 per cent (plus surcharge and cess).
  • However, non-listed MLDs are not tax efficient.
  • The benefit that investors have in a structure like this is:
    • Principal protection as compared to a pure equity investment where there is risk of capital loss.
    • Superior return potential vs traditional fixed income on fulfillment of an underlying equity condition
    • Structure which is at a candy spot versus two traditional asset classes.
  • While the above example would be that of a simple structure, there are various other complicated structures like:
    • Principal protected with a participation rate linked to an underlying index,
    • Principal protected structures which gives a pay off if equity markets go down,
    • Less than 100% principal protection structures etc.
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Risks associated with Market Linked Debentures

  • Issuer’s Profile
    • Although a majority of structures are principal protected, the ability of the issuer to repay is of huge importance.
    • Investors may suffer a capital loss in case the issuer fails to repay on the obligation.
    • Thorough due diligence on the issuer’s underlying business, its diversification and key financial ratios should be undertaken before investing.
  • Fulfillment of the underlying market linked condition
    • Secondly, payment of coupon depends upon a certain market linked condition.
    • Investors need to determine a probability on the fulfillment of the underlying market condition.
  • Due to the complexity of structures and higher minimum allocation, these structures are suitable for HNI and UNHI clients who understand the nuances correctly
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FAQ

Are market-linked investments good?

Market-Linked Investments provide access to a wide variety of asset classes, including some not readily available to an individual investor. Further, these investements may provide full or partial market downside protection and/or enhanced return potential.

What is non convertible debentures?

Non-convertible debentures (NCD) are fixed-income instruments. They are usually issued by high-rated companies in the form of a public issue to accumulate long-term capital appreciation. They offer higher interest rates compared to convertible debentures.

How do we account for market linked debentures in books?

A market linked debenture is a loan taken by the company from the market with no provision of any fixed rate of interest. However, the return to the investors is dependent on some market index like Nifty or Sensex.

Tax and Legality of Bitcoin in India

Cryptocurrency is digital money. Cryptocurrency uses something called cryptography to secure its transactions. With the soaring prices, bitcoins have become a hot favorite amongst Indians lately. In this article, we will be discussing the tax on bitcoin. There are a number of cryptocurrencies that have been created some of which are:

  • Litecoin,
  • Ethereum,
  • Zcash,
  • Dash,
  • Ripple, etc.

What is Bitcoin?

Bitcoin often described as a cryptocurrency, a virtual currency, or a digital currency – is a type of money that is completely virtual. It’s like an online version of cash. The Bitcoin apps ensure you have a bitcoin wallet that helps in storing and selling bitcoins. The creation of wallets takes place when you sign in and create your account.

Balances of Bitcoin tokens are kept using public and private “keys,” which are long strings of numbers and letters linked through the mathematical encryption algorithm that was used to create them.

Generation of Bitcoins

One can obtain the bitcoins in the following ways:

  • Mining
    • Even though bitcoin is a virtual currency, the production of it incurs real cost. One has to ‘mine’ bitcoins and this process consumes electricity.
    • Every Individual (called the “miner”) has to solve a complicated cryptographic problem and the miner is rewarded with a block of bitcoins.
    • People set up powerful computers just to try and get Bitcoins. This is known as mining.
    • So, mining is directly proportional to the expense. The competition of solving this complex problem can make the process even costlier.
  • Buying on an exchange against real Currency
    • You can buy bitcoins from bitcoin exchanges and store them in an online bitcoin wallet in digital form.
    • You can choose any of these Bitcoin exchange platforms – Coinsecure, Zebpay, UnoCoin, etc
    • Bitcoins are purchasable in consideration for real currency.
  • In consideration of goods and services
    • You can use bitcoins (instead of real currency) to buy products and services, but not many shops accept Bitcoin yet and some countries have banned it altogether.

Tax on Bitcoin & Legality in India?

Bitcoins, as of today, are not centrally administered or regulated by any specific body like the RBI which administers physical currency in India. Bitcoin, as a medium of payment, has neither been authorized nor been regulated by any central authority in India. Every single transaction is recorded in a public list called the blockchain. Bitcoins, as of now, have not been given the status of legal tender in India by RBI.

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Tax on Bitcoin in India

The government has not yet considered the tax on bitcoin in the statute books because bitcoins are quite new to Indian Markets. Since the regulatory framework regarding cryptocurrencies is uncertain, this article tries to analyze the taxation by considering them as both goods and currency. The holding period impacts the taxes on bitcoins. The tax treatment of bitcoins will depend upon its generation. Major approaches currently prevalent are as follows:

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Tax on Bitcoin held as Investment

As per Sec 2(14) of the Income Tax Act, capital asset means “property of any kind held by the assessee whether or not connected with his business or profession”. The definition of ‘Capital Asset‘ provided is widest in itself and covers all kinds of property except those expressly excluded under the Act. Therefore, any gains arising out of the transfer of Bitcoins in exchange for real currency is considered as Income from Capital Gains, if they are held for investment. Tax on bitcoin will hence be 15% or 20% based upon the holding period.

Bitcoins will give rise to a Long-term capital gain or a short-term capital gain depending on the period of holding of the bitcoin.

Tax on Bitcoin held as Stock in Trade

The tax treatment of bitcoins when held as ‘stock in trade’ would give rise to income from business. Gain from the sale of bitcoin taxable as business income if traded frequently. Accordingly, the profits arising out of such business would be subject to tax as per the individual slab rates.

Bitcoins received as consideration on sale of goods and services

Bitcoins received as consideration of goods and services shall be treated on par with receipt of money. The receipt of bitcoin shall constitute income in the hands of the recipient. Further, since the recipient received this income out of a business or profession, he would be taxed, normally, under the head “Profits or gains from business or profession“. With regards to the disclosure requirement of bitcoin in the income tax return forms, there continues to be a lack of clarity.

Bitcoin Mining

On taxability of bitcoins earned during the ‘mining’ process, it is said that, Bitcoins generated during the ‘mining’ process are classifiable as self-generated capital assets.

The sale of such bitcoins would, in the ordinary course, give rise to capital gains. However, the cost of acquisition of a bitcoin cannot be determined as it is a self-generated asset. Furthermore, it does not fall under the provisions of Section 55 of the Income-tax Act, 1961 which specifically defines the cost of acquisition of certain self-generated assets. The capital gains computation mechanism fails following the Supreme Court decision in the case of B.C.Srinivasa Shetty. Hence, no capital gains tax would arise on the mining of bitcoins.

Note: There is a possibility that the department may not consider bitcoins as capital assets at all. Hence, the provisions of capital gains would not apply at all. However, the treatment is not yet clear under Indian law which makes it difficult to conclude how it may be taxed.

FAQ

How to set-up Bitcoin Wallet?

The Bitcoin applications ensure you have a bitcoin wallet that helps in storing and selling bitcoins. The creation of wallets takes place when you sign in and create your account.

What is the minimum amount of bitcoins that you can buy?

One bitcoin today might cost you up to INR 26 lakh but you don’t need to buy a whole bitcoin in the beginning. You can start with as low as INR 500 and buy a tiny portion of a bitcoin. However, there is a maximum limit to the number of bitcoins that you can buy.

How can you buy bitcoins in India?

Buying bitcoins in India is easy. You can choose any of these platforms – Coinsecure, Zebpay, and UnoCoin – which are widely trusted in the world of cryptocurrency.

How did the value of bitcoin increase so dramatically?

Mining is directly proportional to the expense. The competition of solving this complex problem can make the process even costlier. The limited availability of bitcoin has also increased its demand. The limited supply has fueled the bitcoin hype, which has led to a sharp increase in its price.

Can we use bitcoins only in India?

Bitcoins can be used anywhere across the globe because it is digital and is termed to be ‘globally accepted’.

Capital Asset – Definition and Types

The most important thing you should know about taxes is the “Capital Gain Tax“. Capital gains are the gains that you have made by ‘transferring’ a capital asset. The transfer could be in the form of selling, exchanging, converting, maturing, or extinguishing the asset. These gains will be chargeable to tax in the year in which the transfer of Capital assets takes place.

What is a Capital Asset?

Capital Asset means any kind of property owned by you, whether or not connected with your business or profession. It includes movable assets, immovable assets, tangible/intangible assets, rights and choices in actions, etc.

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Some of the examples of Capital Assets are House Property, land, building, goodwill, patent, trademark rights, machinery, vehicles, jewelry, etc. whether or not connected with the business or profession of the assessee.

However, the following assets shall not be considered as Capital Assets:

  • ​Any stock in trade, consumables, or raw material held for the purpose of business or profession.
  • Any personal effects like clothes or furniture etc. Which is held for your personal use.
  • Agricultural land not situated within:
    • Jurisdiction of the municipality, notified area committee, town area committee, cantonment board and which has a population of not less than 10,000
    • Range of following distance measured aerially from the local limits of any municipality or cantonment board within:
      • 2 KMs of the municipality or cantonment board which has a population between 10,000 and 1,00,000
      • 6 KMs of municipality or cantonment board which has a population between 1,00,000 and 10,00,000
      • 8 KMs of municipality or cantonment board which has a population of more than 10,00,000
  • Gold Bonds, Special Bearer Bonds & Gold Deposit Bonds issued by Government of India

What are Long Term Capital Asset and Short Term Capital Asset?

If a Capital Asset is held by the assessee for more than 36 months prior to its sale, then it is a Long Term Capital Asset. On the other hand, Short Term Capital Asset means the asset held by an assessee for not more than 36 months prior to its sale. However, in the following cases, the assets will be considered Short Term if they are held for 12 months or less instead of 36 months:

  • Equity or Preference shares
  • ​Debentures or Government securities
  • Units of UTI
  • Units of the equity-oriented mutual fund
  • Zero-coupon bonds

If the above mentioned assets are held for more than 12 months, they will be considered as Long Term Capital Assets.

FAQ

How are capital gains taxed?

Capital gains are profits from the sale of a capital asset, such as shares of stock, a piece of land, or a work of art. Capital gains are generally included in taxable income. But in most cases, are taxed at a lower rate.

Why is period of holding important?

Determination of period of holding is important because it impacts the method of calculating Capital Gains and also the tax rates.

Section 115QA – Tax on Buyback of Shares

What is Buyback of Shares?

In simple terms, buyback of shares is when a company repurchases the shares issued by it from the existing shareholders. The company buys back its shares usually at market value or higher. Companies use buy back as a means to return cash to shareholders and regain ownership. Tax on buyback of shares in India is now regulated by Section 115QA of the Income Tax Act, 1961.

Why do Companies Buyback shares?

As per recent trends, one can observe an increasing use of buy back as means of capital restructuring by Indian companies. The following are certain objectives a company aims to achieve when it undertakes buyback:

  • Share buybacks reduce the number of shareholders of the company, thus enhancing the EPS (Earning per share) to shareholders in the long run. 
  • Management may feel the market has undervalued its share price too sharply, hence a buyback may result in fairer valuation of the company’s stock price.
  • Helps improve key financial ratios like return on net worth, return on assets etc. over a period of time.
  • Serves as a positive sign for investors about the confidence of the management in the business. 
  • Provide exit to investors in times of volatility

Income Tax on Buyback of Shares under Section 115QA

Earlier, the amount distributed as buy-back of shares was chargeable to capital gains in the hands of the shareholders and not charged to the company. As a result, income tax was payable at lower rates on buyback of shares. In order to avoid the tax, companies started resorting to buyback of shares as an attractive way to distribute surplus income amongst stakeholders. As an anti-tax avoidance measure, the government introduced Section 115QA under the Income Tax Act vide the Finance Act, 2013.

Initially, section 115QA was applicable only to unlisted companies. However, the Union Budget 2019 announced the said section to be applicable to the listed companies as well. The amendment is effective for all buybacks post July 5, 2019, vide Finance Act (No.2) 2019.

What does Section 115QA say?

  • Both listed and unlisted companies are liable to pay additional income tax on the amount of distributed income on buyback of shares from shareholders. 
  • The tax on distributed income (i.e. buy-back) is payable by the company even if such company is not liable to pay income tax.
  • The company is liable to pay tax at 20% plus surcharge at 12% plus applicable cess.
  • The company is liable to pay the tax within a period of 14 days from the date of payment to the shareholders on the buyback.
  • The tax on buyback shall be treated as final payment of tax. No further credit shall be claimed either by the company or any other person in respect to the tax so paid.
  • As companies are now liable to pay tax on buyback of shares. Furthermore, shareholders do not have to pay any tax on any income arising from the buyback.

When are the provisions of Section 115QA not applicable?

The provision of Section 115QA is not applicable under all of the situations below:

  • The company is listed on the recognized stock exchange; and
  • The company has announced buyback of its shares; and
  • The public announcement took place before July 5, 2019; and was in accordance with the provisions of the Securities and Exchange Board of India (Buyback of Securities) Regulations, 2018.

Illustration

A company repurchased 100 shares in January 2019 at the market price of INR 50. The issue price for the same is INR 10.

Tax Liability Prior to Amendment Post Amendment
Company No tax liability The company is now liable for a buyback tax of 20% on the distributed income that is Rs. 40, the difference between market price and issue price (50-10).
Individual shareholder Individual shareholders must pay capital gains tax (long term or short term) depending on the holding period of shares on the difference amount (Market price – Issue Price) that is Rs. 50– Rs. 10 = Rs. 40. No tax liability

Implications to individual shareholders

Generally, a company which has distributable surplus has two options to return cash to its shareholders: 

  • Declare dividend
  • Buyback its shares

Earlier, the declared dividend was chargeable as Dividend Distribution Tax (DDT) to the company and not the shareholder. Whereas the amount distributed as buy-back of shares was chargeable to the shareholder and not the company. The rationale for the introduction of Sec 115 QA was that companies would resort to buyback of shares in order to avoid dividend distribution tax. However, under budget 2020, DDT on dividends was abolished and the company is no longer liable to pay tax on dividends. Instead, dividends would be taxable in the hands of the shareholder (as per applicable slab rates). From the shareholder’s perspective, this means that income from buybacks is now more tax efficient compared to income from dividend.

FAQs

I am an employee and my company recently announced an ESOPs buyback, do I have to pay tax on income received through through these ESOPs sales?

No, when it comes to buyback of shares, the provisions under sections 10(34A) and 115QA of the Income Tax Act shall intervene. As per section 10(34A), any income arising to a shareholder (including ESOP-shares) on account of buyback of shares by the company shall be exempt in the hands of such shareholders. Further, as per section 115QA, the tax @ 20% shall be paid by the unlisted company on the buyback of its shares.

Can tax credit be claimed for tax paid on buyback of shares?

The tax on distributed income paid/ payable by the company shall be treated as final payment of tax. No further credit shall be claimed either by the company or any other person in respect of the amount of tax so paid. Further, income charged under section 115QA shall not be allowed any deduction under any other provisions of the Act either to the company or shareholders.

CAMS – Consolidated Capital Gains Statement

When an investment (e.g. Stocks, Bonds, Mutual Funds, Real estate), is sold, the profit part of the sale value is called Capital Gains. In such a situation, capital gains are taxable in the year they are realized or in the financial year when you made the sale.

Therefore, in order to assess the tax liability and file the tax returns correctly, the taxpayer needs to know about their earnings from the capital gains during the financial year.

This information is generally contained in a Capital Gains statement for their investments. If you are investing in Mutual Funds in a non-Demat form there are multiple ways to get your Capital Gains statement for the financial year. In this case, we will discuss the method to get the consolidated capital gains report from CAMS.

Investors investing via more than two platforms and/or investing offline as well can make use of the consolidated Capital Gains statement mailback service provided by RTAs like CAMS and KARVY.

What are RTAs

SEBI approves intermediaries such as The Registrar and Transfer Agents. They handle the back-office operations of Mutual Funds so that Mutual Funds can focus on the investment management and other avenues.

The two exceptions to CAMS and KARVY are Franklin MF and Sundaram MF who have their own RTAs. Instead of getting the Capital Gains report from individual Mutual Fund companies, you can also get reports from the RTAs which will contain information of Capital Gains of all the Mutual Fund companies they work with respectively.

If you don’t have any investments with Franklin or Sundaram, you only need to get the Capital Gains report from two places – CAMS and KARVY.

Steps to Download Consolidated Capital Gains Statement from CAMS

  1. Go to CAMS Investor Mailback Services  

    Go to the CAMS online webpage. Click on the option to accept T&Cs and then click on “Proceed.”

  2. Realized Gain Statement

    Click on the realized gain statement option.

  3. Enter the required details

    In the case of the time period – choose the default option of the current FY and previous FY.
    Enter the e-mail ID registered in the investment folios.
    Moreover, PAN is optional but if you provide your PAN number then it will also include those investments under your PAN where you may have not registered your email id.
    Lastly, select “All Funds” and “e-mail an encrypted attachment” for the delivery option.

  4. Consolidated Capital Gains Statement

    Enter the password for encrypting the mail. It’ll take approximately 30 minutes until you receive the mail once you submit the form.

You will receive two Capital Gains Statement files in the mail. One for the current FY and one for the previous FY. Typically you would use the previous FY statement since you would be filing returns in June/July for the previous FY. Moreover, both the files can be opened with the same password you had set in earlier.

Sample CAMS – Capital Gains Statement

FAQs

What are the pre- requisites for using myCAMS?

– Common email id registered across investor’s Mutual Fund investments, serviced by CAMS
– High-speed internet connection in your PC or hand held devices.

Can I change my address, contact numbers and bank mandate on myCAMS?

No. Due to investor data security reasons such facilities are not offered on myCAMS mobile App. Investor need
to submit a request written request at the CAMS Investor Service Center for the same.

What are the upcoming features in myCAMS?

– Notifications messages on transaction confirmations, KYC verifications, etc
– Alerts on Corporate Actions, forthcoming Dividend declarations, current NFOs

Download Consolidated Capital Gains Statement from KARVY

When an investment (e.g. Stocks, Bonds, Mutual Funds, Real estate), is sold, the profit part of the sale value is called Capital Gains. In such a situation, capital gains are taxable in the year they are realized or in the financial year when you made the sale.

Therefore, in order to assess the tax liability and file the tax returns correctly, the taxpayer needs to know about their earnings from the capital gains during the financial year.

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This information is generally contained in a Capital Gains statement for their investments. If you are investing in Mutual Funds in a non-Demat form there are multiple ways to get your Capital Gains statement for the financial year. In this case, we will discuss the method to get the consolidated capital gains report from KARVY.

Investors investing via more than two platforms and/or investing offline as well can make use of the consolidated Capital Gains statement mailback service provided by RTAs like CAMS and KARVY.

Steps to Download Consolidated Capital Gains Statement from KARVY

  1. KARVY Online

    Visit the KARVY investor mail-back service for the capital gains website.

  2. After KARVY Login

    After logging in, scroll down and click on the Investor Service tab.

  3. Capital Gain Mail Option

    Moreover, click on the capital gain by mail option.

  4. Enter the required details

    Enter the e-mail ID registered in your investment folios.
    Password – This is the password for opening the attachment. You can set it to anything you want.
    Choose 1st April 2018 from the date picker and for To Date chooses 31st March 2019 to get the Capital Gains statement for the previous Financial Year

Once the form is filled, click on the option to submit. Contrary to the situation with CAMS, you will instantly receive the statement in your mail.

Sample KARVY – Capital Gains Statement

FAQs

Can I invest on online instead of offline?

Yes, once you register with your PAN, all your existing investments done through Karvy will be visible on this platform. However, you will not be able to edit/redeem the offline investments through this account.

Can I invest in direct plans of mutual funds through this account?

No, you can invest only in regular plans of mutual funds through this online investment account.

Do I have to register e-mandate separately for all the transaction I do on the KARVY platform?

No, this is a one time process. This process is linked to bank account.