Sovereign Gold Bond – Taxation on SGB

What is SGB – Sovereign Gold Bond?

SGB i.e. Sovereign Gold Bond are bonds issued by the government of India under the Sovereign Gold Bond (SGB) Scheme. SGB is government security denominated in grams of gold and is thus an alternative to holding physical gold. Investors such as Individuals, HUF, trust, university, and charitable institutions can invest in SGB. RBI i.e. Reserve Bank of India issues such bonds to the investors at an issue price with a fixed maturity.

The minimum investment is 1 gm and the maximum is 4 kg for Individuals and HUFs. It is 20 kg for trusts and other entities as per the government. These bonds are issued for a tenure of 8 years. Premature redemption is only possible after the completion of 5 years of investment. Additionally, investors can sell the bonds in the secondary market at the existing market price of gold.

Income Head for Sovereign Gold Bond

Capital Gains on Sale of SGB

Income from Capital Gains would arise on the redemption of SGB or sale of SGB on the stock exchange. Both redemption and sale are covered under the definition of transfer of a capital asset. While Redemption of SGB means its expiry on the date of maturity (including pre-mature redemption), Transfer of SGB is its sale on a recognised stock exchange.

IFOS Income from SGB

The RBI on behalf of the government pays periodical interest on SGB. The rate of interest is 2.5% per annum on the amount of initial investment. Interest is credited semi-annually and the last interest is payable to the investor on the date of maturity along with the principal.

Interest on SGB is taxable under the head IFOS (Income from Other Sources). The taxpayer should report the interest under Schedule OS in the Income Tax Return.

Tax on Sovereign Gold Bond

Tax Treatment on Interest

The Interest on SGB is taxable at slab rates under the head IFOS (Income from Other Sources).

Section 193 for TDS on Interest on Securities specifically mentions that no tax should be deducted on interest paid on government security. Thus, TDS is not applicable for payment of interest on SGB.

Tax Treatment on Sale or Redemption

Individual Investor

  • Redemption of Sovereign Gold Bond – Capital Gain on Redemption of Sovereign Gold Bond by an Individual Investor is exempt from tax since it is excluded from the definition of transfer as per Section 47 of the Income Tax Act.
  • Transfer of Sovereign Gold Bond – If the individual investor transfers the Sovereign Gold Bond by selling it on the stock exchange, it is taxable as LTCG if held for more than 12 months at the rate of 20% with indexation benefit, otherwise, tax is charged at the rate of 10% without indexation or STCG if held for up to 12 months at the slab rates applicable to the taxpayer.

Other Investors

The redemption or transfer of SG Bond in case of investors other than individuals is taxed as LTCG at the rate of 20% with indexation benefit or at the rate of 10% without indexation benefit. STCG at slab rates if held for up to 12 months.

Applicable ITR Form in case of SGB

  • ITR Form: If you have invested into SGB and earned Interest, you should file ITR-1 (ITR for IFOS Income). However, if you have redeemed or sold SGB, you should file ITR-2 (ITR for Capital Gains Income).
  • Due Date – 31st July of the Assessment Year. Thus, ITR for FY 2020-21 (AY 2021-22) should be filed on or before 31st July 2021.

FAQs

What is the benefit of investing into SGB (Sovereign Gold Bond) over physical gold?

SGB is a government security that investors holds in demat form thus eliminating the risk and cost of holding physical gold. The investor need not worry about the purity of gold and need not pay making charges if they invest into SGB. The investment in SGB is safer than physical gold since SGB is a government security, pays periodical interest and assures market value of asset on maturity.

What would be the tax treatment if SGB is bought on the secondary market and held it till maturity?

Tax treatment of SGB bought from the secondary market and redeemed (held until maturity) is as follows:
– Exempt if you are an Individual Investor
– Taxable at slab rates if STCG and at 20% with indexation benefit if LTCG if you are any other investor.

What is the rate of interest and how is it payable?

The bonds bear interest at the rate of 2.5% p.a. on the amount of initial investment. Additionally, the interest will be credited semi-annually to the bank account of the investor and the last interest will be payable on maturity along with the principal.

How will I receive the redemption amount?

The interest and redemption amount will be credited to the bank account furnished by the customer at the time of buying the bond.

Can I receive the bonds in the Demat form?

Yes. The bonds can be held in the Demat account. A specific request for the same must be made in the application form itself. Till the process of dematerialization is completed, the bonds will be held in RBI’s books. The facility for conversion to Demat will also be available subsequent to the allotment of the bond.

Can I use these securities as collateral for loans?

Yes, these securities are eligible to be used as collateral for loans from banks, financial Institutions and NBFCs. But, it would be subject to decision by authority and can’t claim as matter right.

Tax on Gifted Shares & Securities

A gift is a sum of money or movable property or immovable property received without consideration or inadequate consideration. Tax on shares gifted is defined under Section 56(2) of the Income Tax Act.

A gift of monetary value exceeding INR 50,000 is taxable as Income from Other Sources (IFOS) at slab rates. The gift received from a relative, or on the occasion of marriage, as inheritance or in contemplation of death is exempt from tax.

Gift of Shares & Securities

Shares and securities are considered as movable property. Trading plaforms like Zerodha have built a platform to gift stocks, mutual funds and bonds after introduction of e-DIS (electronic delivery instruction slip) by CDSL. Thus, it is now possible to gift stocks and securities to friends and relatives online.

Tax on Shares Gifted for Sender

  • On transfer of shares & securities:
    • The Gift Tax Act (GTA) was abolished in 1988 and thus sender need not pay tax on gifts.
    • As per Section 2(14) of the Income Tax Act, shares and securities are Capital Assets. The transfer of a Capital Asset is taxable as Capital Gains. However, the definition of ‘transfer’ as per Section 47 specifically excludes gifts. Thus, the gift of shares and securities is not taxable in the hands of the sender of the gift.
  • On the sale of shares & securities:
    • The sale of shares & securities is not taxable in the hands of the sender of the gift.
    • Clubbing of Income – If the receiver of the gifted asset is a spouse or minor child, any income that arises directly or indirectly from such asset is clubbed with the income of the sender as per Section 64(1)(iv) & Section 64(1A) of the Income Tax Act.

How to tax shares received as gift?

Want to gift shares, what will be the Income Tax liability? and if shares transferred off-market (without paying STT) what is the tax treatment?

How to tax shares received as gift?

Want to gift shares, what will be the Income Tax liability? and if shares transferred off-market (without paying STT) what is the tax treatment?

Tax on Shares Gifted for Receiver

  • On transfer of shares & securities:
    • If the monetary value of shares & securities is up to INR 50,000, such gift is exempt from tax.
    • If the monetary value (FMV) of shares & securities is more than INR 50,000, such gift is an IFOS income and taxed at slab rates.
    • Shares & Securities received from a relative is exempt income since gift from relative is exempt as per Sec 56(2)(vii)
    • Shares & Securities received on the occasion of marriage or inheritance or in contemplation of death of payer is exempt income since such gifts are exempt as per Sec 56(2)(vii)
  • On the sale of shares & securities:
    Capital Gains tax would arise on the sale of shares. To calculate the tax on gifted shares, the following must be noted:
    • Period of Holding: Calculate the holding period from the date of purchase by the previous owner i.e. sender of gift to the date of sale by the receiver of the gift.
    • LTCG – Equity Shares held for more than 12 months from date of purchase by the sender to date of sale.
    • STCG – Equity Shares held for up to 12 months from date of purchase by the sender to date of sale.
    • Purchase Date – The date of purchase by the previous owner i.e. sender of the gift
    • Purchase Value – The value of the purchase of the previous owner i.e. sender of the gift
    • Sale Date – The date of sale by the receiver of the gift
    • Sale Value – The value of the sale by the receiver of the gift
    • Tax Liability – Calculate tax liability as per the nature of the capital asset
Transaction Sender Receiver
Gift of shares & securities Not taxable Exempt Income or IFOS Income
Sale of shares & securities Not taxable Capital Gains

Clubbing of Income – If the receiver of the gifted asset is a spouse or minor child, any income that arises directly or indirectly from such asset is clubbed with the income of the sender as per Section 64(1)(iv) & Section 64(1A) of the Income Tax Act.

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Example

Rajiv purchased 2000 shares at INR 100 of ABC Ltd on 15th February 2020. He gifted 1000 shares to his mother, Shweta on 1st September 2020. FMV on 01/09/2020 was INR 200 per share. Shweta sold out these shares on 2nd March 2021 at INR 400. Calculate the tax liability.

Tax treatment for Rajiv (sender) – No tax liability since the gift of shares is not treated as a transfer of capital asset.

Tax treatment for Shweta (receiver)

  • On receiving a gift – no tax liability since gift from a relative is an exempt income as per Section 56(2)(vii) of Income Tax Act.
  • On the sale of shares. Here is the tax calculation:
    • Sale Date – 02/03/2021
    • Sale Value – INR 4,00,000 (400 * 1000)
    • Purchase Date – 15/02/2020 (as per previous owner)
    • Purchase Value – INR 1,00,000 (100 * 1000) (as per previous owner)
    • LTCG – 4,00,000 – 1,00,000 = INR 3,00,000
    • Tax on LTCG u/s 112A = 10% * 2,00,000 = INR 20,000

Reporting in ITR – Tax on Shares Gifted

The sender of the gift need not report the gift in the Income Tax Return. The receiver of the gift should report the gift under Schedule Exempt Income if the income is exempt or Schedule OS (IFOS) if the income is taxable. If the gift is taxable, calculate tax liability at slab rates.

On the sale of such shares & securities, report income as capital gains under Schedule CG. The taxpayer should file ITR-2 on the income tax website and pay tax at applicable rates.

Documentation

It is very important to maintain proper documentation for gift transactions. It is advisable for the sender and receiver to maintain a registered a gift deed as a proof of the gift transaction. In cases of scrutiny, this document can be used to justify the genuineness of the gift transaction and avoid charges for tax evasion.

FAQs

I have 1 lac shares. If I gift 50% shares to my brother, can we both claim LTCG exemption of INR 1 lac on sale of such shares?

If you gift equity shares, it is not considered as the transfer of a capital asset, and thus income tax is not applicable. A gift from a relative is exempt and thus it would be exempt for your brother. When your brother will sell the shares, capital gains would arise.
You can both claim the benefit of LTCG exemption of up to INR 1 lakh u/s 112A. However, to determine the nature of the gains, the holding period & cost of acquisition is calculated as per the previous owner (sender).

I want to gift shares to my friend, is it taxable?

If the monetary value of the gift is up to INR 50,000, it is not exempt as per Sec 56(2)(vii).
If the monetary value of the gift is more than INR 50,000, it is taxable in the hands of the receiver as IFOS and taxed at slab rates.
However, if the gift is given on the occasion of marriage, it is exempt as per Section 56(2)(vii) of the Income Tax Act.

Can I save taxes by gifting shares to my wife?

Gift of shares and securities to a relative is not taxable in hands of the sender of the gift and exempt in hands of the receiver of the gift. If you gift shares to your wife, there would be no tax liability on the gift transaction. Further, if your wife sells the shares, Capital Gains would arise and tax should be paid at applicable rates. On gifting of shares, the income would get divided and both can enjoy exemption limits. Thus, taxes would be saved.

Income Tax on Debt Funds in India

What are Debt Funds?

If you have invested in Mutual Funds, you need to file your ITR and pay tax on this income. Trading in various types of MFs has become very easy due to the availability of online trading platforms. Under Income Tax, trading in Debt Mutual Funds is classified as a Capital Gains Income.

  • Debt MFs – Funds that invest in fixed income securities like bonds, treasury bills, and other debt instruments. Types of debt mutual funds include liquid funds, short-term funds, income funds, hybrid funds, etc.
  • Equity Mutual Funds – Equity oriented MFs are funds that invest in equity instruments. Types of equity mutual funds include large-cap funds, mid-cap funds, small-cap funds, ELSS (Equity Linked Savings Schemes), Index funds, etc.
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Income Heads for Income from Debt Funds

Capital Gains on Debt Funds

Debt Funds – Since these MFs invest in debt instruments, the treatment is similar to other capital assets.

  • LTCG: Any gain arising on the sale or redemption of a debt fund held for more than 36 months is considered as LTCG.
  • STCG: Any gain arising on the sale or redemption of a debt fund held for less than 36 months is considered as STCG.

Debt Fund Taxation

The taxability of MFs would depend upon the nature of income. Capital Gains on Debt Mutual Funds are taxable as per the table below.

Type of MF Period of Holding Long Term Capital Gain Short Term Capital Gain
Debt Fund 36 months 20% with Indexation Slab Rates

Other Income from Debt Mutual Funds is taxable in the following manner:

  • Dividend Income – Exempt up to FY 2019-20. Taxable at slab rates FY 2020-21 onwards.
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ITR Form, Due Date and Tax Audit Applicability for Investors

  • ITR Form: Trader should file ITR-2 (ITR for Capital Gains Income) on Income Tax Website if income is treated as Capital Gains.
  • Due Date
    • Up to FY 2019-20
      31st July – for traders to whom Tax Audit is not applicable
      30th September – for traders to whom Tax Audit is applicable
    • FY 2020-21 Onwards
      31st July – for traders to whom Tax Audit is not applicable
      31st October – for traders to whom Tax Audit is applicable
FY 2019-20: Due Date to file Income Tax Return in case tax audit is not applicable is 31st Decemeber 2020 and when tax audit is applicable it is 31st January 2021
Tip
FY 2019-20: Due Date to file Income Tax Return in case tax audit is not applicable is 31st Decemeber 2020 and when tax audit is applicable it is 31st January 2021
  • Tax Audit: Since the income is treated as Capital Gains, the applicability of tax audit under Section 44AB need not be determined.
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Carry Forward Loss for Debt MFs Trading

  • Short Term Capital Loss (STCL) can be set off against both Short Term Capital Gain (STCG) and Long Term Capital Gain (LTCG). Remaining loss can be carried forward for 8 years and set off against STCG and LTCG only.
  • Long Term Capital Loss (LTCL) can be set off against Long Term Capital Gain (LTCG) only. Remaining loss can be carried forward for 8 years and set off against LTCG only.

Example

Mr. Vijay is a salaried individual and has done mutual fund trading in FY 2020-21. His total salary income for a year is INR 8,70,000. And has Short Term Capital Loss of INR 30,000 from Debt Mutual Funds and Long Term Capital Gain of INR 2,50,000 from Equity Shares.

Now in the above example, Vijay needs to file ITR-2 for FY 2020-21. And his total income and tax liability will be as follows:

Particulars Amount (INR) Amount (INR)
Salary Income   870000
Capital Gains    
Short Term Capital Loss (30000)  
Long Term Capital Gain 250000  
Less: Exemption u/s 112A (100000)  
Taxable Long Term Capital Gain 150000  
Total Capital Gains after set-off of losses (taxed @10%)   120000
Total Taxable Income   990000
Tax at slab rate 86500  
Tax at special rate 12000  
Total Income Tax   98500
Health & Education Cess @4%   3940
Total Tax Liability   102440
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FAQs

How do I report income from trading in Debt Mutual Funds in the Income Tax Return (ITR)?

A trader should file ITR-2 and report income from trading in Debt Mutual Funds as Capital Gains.
Tax on LTCG – 20% with indexation
Tax on STCG – slab rates
The trader can set off LTCL with LTCG and STCL with both STCG and LTCG. The remaining loss can be carried forward for 8 years.

What is Indexation benefit?

Using the Indexation benefit, the taxpayer can adjust the Cost of Acquisition of the capital asset after considering the effect of inflation. Indexation is calculated using the CII (Cost Inflation Index) issued by the Income Tax Department. The taxpayer is allowed to calculate the indexed cost of acquisition to calculated capital gain on redemption of debt mutual funds. Indexation increases the cost of acquisition and thus lowers capital gains and tax liability.

Is Mutual Fund taxable?

Yes. Income from Mutual Fund is taxable under the Income Tax Act.
(a) Capital Gain on Sale of Equity Mutual Funds – Tax on LTCG is 10% in excess of INR 1 lac and tax on STCG is 15%.
(b) Capital Gain on Sale of Debt Mutual Funds – Tax on LTCG is 20% with indexation and tax on STCG is as per slab rates
(c) Dividend Income on Mutual Funds – Taxable at slab rates from FY 2020-21
(d) Interest Income on Mutual Funds – Taxable at slab

GST for Traders – Do they need GST Registration?


GST is applicable if the aggregate turnover of a business exceeds the threshold limit. Once the business is registered under GST, it must charge GST on the sale of goods or services. It is applicable to manufacturers, traders and service providers. Does GST apply to stock traders also? The applicability of GST to trading in securities is a confusing question prevalent amongst traders. GST is not applicable to income from trading in stocks, shares, mutual funds, futures, options etc. Let us understand in detail.

Does having GST for Traders have any benefit?

What is recommended - having GSTIN and filing both GST and ITR or just simply file ITR no need of GST?

Does having GST for Traders have any benefit?

What is recommended - having GSTIN and filing both GST and ITR or just simply file ITR no need of GST?

Is GST applicable to Securities Traders?

It is mandatory to register under GST if the Aggregate Turnover exceeds the threshold limit of INR 40 Lakh (INR 20 Lakh for special category states) for sale of goods or INR 20 Lakh (INR 10 Lakh for special category states) for sale of services. As per Section 22 of CGST Act, Aggregate Turnover is the total sales value of taxable/exempt goods or services.

The GST Act specifically excludes Securities from the definition of Goods. As per Section 2(52), Goods means any movable property except money and securities. The definition of Services means anything other than goods, money and securities. Thus, trading in shares and securities is not considered as supply as per the GST Act and falls outside the purview of GST. Therefore, securities traders are not liable to register under GST.

However, it must be noted that if a broker is earning brokerage income from securities trading, GST registration is mandatory if such brokerage exceeds the threshold limit.

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Should I include Trading Turnover in Aggregate Turnover?

Trading Turnover is the turnover calculated for each trading segment as per the reporting requirements of the Income Tax Act.

Aggregate Turnover includes the sum of the sale of goods and services. Since the definition of goods and services excludes securities, the aggregate turnover should not include trading turnover to determine the applicability of GST Registration.

Trading Expenses on Securities Trading

Expenses incurred on trading in securities also includes CGST, SGST or IGST. This is the GST on expenses such as brokerage, transaction costs, turnover fees, etc that the trader pays for trading transactions. The trader can claim such expenses against the profit/loss from trading while filing the Income Tax Return on the income tax website.

GST for Traders – Reporting in ITR-3

Turnover as per ITR must match with sales reported in GST Return to avoid any mismatch notice. If the trader does not have GST Registration, he/she need not report details of GSTIN in the Income Tax Return. If the trader has income from any business other than securities trading and has GST Registration, it is advisable to report the trading turnover from securities trading under Non-GST Supply in the GST Return.

FAQs

Does securities also cover derivatives?

The GST Act excludes Securities from the definition of Goods. Securities shall have the same meaning as per Section 2 of Securities Contracts (Regulation) Act, 1956 and includes shares, scrips, stocks, bonds, debentures, debenture stock, other marketable securities and derivatives.

Is GST applicable on brokerage earned in Stock broking services?

Yes. A stockbroker provides stockbroking services that fall under the definition of ‘Services’ under GST. Therefore, such sale value must be included in Aggregate Turnover to determine the applicability of GST Registration.

My trading turnover from share trading exceeds INR 40 lacs. Do I need to register under GST?

Trading in securities does not fall under GST since the definition of ‘Goods’ and ‘Services’ as per the GST Act excludes securities. Therefore, even if the trading turnover exceeds the threshold limit, GST is not applicable.

Dividend Distribution Tax – DDT

What is a Dividend Distribution Tax?

Dividend Distribution Tax is the tax paid on dividends distributed by a company to its shareholders. A Domestic Company must pay DDT as per the provisions of Section 115O of the Income Tax Act. Since the Company pays DDT, the dividend income is exempt in the hands of the shareholder under Section 10(38). Under Budget 2020, the Finance Minister abolished DDT. As a result, the dividend income is now a taxable income in the hands of the shareholder. DDT would not be applicable to any dividend paid on or after 1st April 2020.

  • A Domestic Company was liable to pay DDT Tax as per Section 115O.
  • The company should pay DDT within 14 days from the date of declaring, distributing or paying the dividend whichever is the earliest.
  • If the Company does not pay dividends within 14 days, interest at a rate of 1% is payable by the Company from the date on which DDT was payable up to the date of payment of DDT to the government.

Union Budget 2021 Update

After the abolishment of DDT under Budget 2020, dividend which was earlier exempt now became a taxable income. Under Budget 2020, TDS under Section 194 and Section 194K was introduced for deduction of TDS on dividend paid on equity shares and equity mutual funds. Under Budget 2021, dividend paid to REIT / InvIT is now exempt from TDS.

Advance Tax liability would arise on dividend income only once the dividend is declared or paid since it is difficult for the shareholders to estimate the dividend income accurately.


DDT – (Dividend Distribution Tax) Rate

A Domestic Company distributing or declaring dividends should pay DDT at 15% on the gross dividend as per Section 115O. Since the DDT is calculated on Gross Dividend, the effective rate comes to 17.65%.

TDS on Dividend paid in FY 2020-21
Refer to this blog to know more about TDS under Section 194 & Section 194K
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TDS on Dividend paid in FY 2020-21
Refer to this blog to know more about TDS under Section 194 & Section 194K
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Example

A Domestic Company declares a dividend of INR 5,00,000 on 10th April 2019. Calculate DDT that Company should pay.

  1. Calculate Gross Dividend

    Gross Dividend (100%) = Net Dividend (85%) + DDT (15%)
    Gross Dividend = INR 5,00,000 * 100/85 = INR 5,88,235.29

  2. Calculate DDT on Gross Dividend

    DDT = Gross Dividend * 15%
    DDT = INR 5,88,235 * 15% = INR 88,235

Note: Thus, the effective DDT rate is 17.65%. Further, the above rate does not include cess and surcharge. After calculating cess and surcharge, the effective rate is 20.56%.

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Abolishment of Dividend Distribution Tax

Under Budget 2020, the Finance Minister abolished Dividend Distribution Tax i.e. DDT. A Company is no longer liable to pay DDT. As a result, the dividend income which was earlier exempt up to INR 10 lacs, now became taxable for the investors. Such dividend income would be taxable at slab rates. Since the dividend income is taxable, TDS becomes applicable on such Income. The Finance Minister also introduced a new TDS section for TDS on dividendSection 194K (TDS on Dividend from Equity Mutual Funds) and amended the existing Section 194 (TDS on Dividend from Equity Shares).

FAQs

What is the tax treatment of dividend income from Foreign Company?

Dividend income from a foreign company is a taxable income. The investor should report it under the head Income from Other Sources. The income tax on dividend income is as per slab rates. The provisions of DDT or TDS are applicable to a Domestic Company only.

Why was the Dividend Distribution Tax (DDT) abolished under Budget 2020?

Upto FY 2019-20, a Domestic Company was liable to pay DDT at 15% on the Gross Dividend. On the other hand, Dividend was an exempt income for the shareholders.
To provide relief to the Domestic Companies and boost foreign investments, DDT was abolished under Budget 2020. Since the tax on distribution of dividend was removed, the dividend income became taxable for the shareholders. Thus, for any dividend declared or paid on or after 1st April 2020, it is taxable in the hands of the shareholder. The Company is also liable to deduct TDS as per Sec 194 or Sec 194K.

Securities Transaction Tax – STT

STT i.e. Securities Transaction Tax is levied on the purchase and sale of securities listed on a recognized stock exchange in India. The STT Act has a list of securities on which STT is applicable. Such securities include equity, derivatives, and units of equity mutual fund. The STT rate is prescribed by the Government. STT should be paid by buyer or seller.

  • The recognized stock exchange collects STT from the buyer or seller
  • The recognized stock exchange deposits STT with the government on or before 7th of the next month
  • Buyer or Seller can claim STT as a business expense against trading income

If the recognized stock exchange is unable to collect STT from the trader, it is still liable to deposit STT with the government to avoid interest and penalty.

Securities on which STT is levied

Securities Transaction Tax is charged on the Securities that are traded on a recognized stock exchange in India. Following is the list of securities on which STT is levied.

Securities Transaction Tax Rates

Transaction STT Rate Who pays? Value
Purchase of equity share (delivery based) or unit of business trust 0.1% Buyer Purchase Value
Sale of equity share (delivery based) or unit of business trust 0.1% Seller Sale Value
Purchase of equity mutual fund (delivery based) NIL Buyer Not Applicable
Sale of equity mutual fund (delivery based) 0.001% Seller Sale Value
Sale of equity share (intraday) and equity mutual fund (without actual delivery) 0.025% Seller Sale Value
Sale of Exchange Traded Funds (ETFs) 0.001% Seller Sale Value
Sale of Futures 0.01% Seller Sale Value
Sale of Options (option not exercised) 0.017% Seller Option Premium
Sale of Options (option is exercised) 0.125% Buyer Settlement Price
Sale of unlisted equity shares under an IPO which are later listed on a recognized stock exchange 0.2% Seller Sale Value

Income Tax on Securities with STT paid

The income tax rate for securities on which STT is paid is lower than the income tax rate for other assets. Here are the Income Tax rates for securities on which STT is paid.

Type of Security Period of Holding LTCG STCG
Equity Shares / Equity MF / ETF / ESOP / RSU 12 months 10% in excess of INR 1 lac 15%
Foreign Shares 24 months 10% without indexation slab rate

In the case of Equity Shares and Equity MF, the investor should calculate the cost of acquisition after applying the grandfathering rule. Read about how to calculate income tax on LTCG on sale of equity shares and equity mutual funds.

A trader having income from trading in securities and report such income as Business Income can claim STT as a valid business expense. STT paid on trading transactions is a direct expense related to trading income. The trader can report it as an expense in the P&L Account while filing ITR-3 on the Income Tax Website.

FAQs

How is STT charged on Intraday Trading?

STT is charged on the sell value of the transaction at 0.025%. Here is an example:
Trader buys 100 shares of HDFC at Rs.1000 each at 11:30 AM on Monday & sells them off at Rs.1006 at 2:00 PM. STT will be Rs.25.13 calculated as Rs.1006*100*0.025% = Rs.25.15

How is STT charged on F&O Trading?

STT is charged on the sell value of the transaction at 0.01%. Here is an example:
A trader sells 1 lot of NIFTY on at 9000. His total volume comes to Rs.9000*75 = Rs.6,75,000. STT on this trade will be calculated as Rs.6,75,000*0.01% = Rs.67.5

How is STT different from CTT?

STT is Securities Transaction Tax and CTT is Commodity Transaction Tax. STT is levied on trading in securities such as equity delivery, equity intraday, equity F&O, ETFs, Mutual Funds etc. CTT is levied on trading in non-agri commodity derivatives.

Income Tax on Unlisted Shares in India

What are Unlisted Shares?

A Stock that is not listed on a recognized stock exchange is an unlisted stock. A trader or investor who buys and sells unlisted stocks should file ITR and pay tax on the income. Sale of Unlisted Shares is a Capital Gains Income as per the Income Tax Act. The Income Tax treatment of unlisted shares is not the same as the listed share.

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Capital Gain on Sale of Unlisted Shares

Unlisted Stock is not listed on any recognised stock exchange. Thus, the Company does not pay STT i.e. Securities Transaction Tax on such shares. The period of holding is 24 months.

  1. Long Term Capital Gain (LTCG): If an investor sells an unlisted stock held for more than 24 months, gain or loss on such sales is a Capital Gain or Capital Loss.
  2. Short Term Capital Gain (STCG): 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).

Income Tax on Unlisted Shares

Income Tax on Trading in unlisted shares is similar to the tax treatment of other capital assets. The following are the income tax rates on the sale of unlisted shares of a Domestic Company or Foreign Company.

  • LTCG – 20% with Indexation
  • STCG – taxed as per slab rates

Note: In the case of a Non-Resident, LTCG on Unlisted Stock is 10% without Indexation.

ITR Form, Due Date and Tax Audit Applicability for Unlisted Shares

  • ITR Form: Trader should file ITR 2 (ITR for Capital Gains Income) on Income Tax Website since income on the sale of unlisted stocks is a Capital Gains.
  • Due Date
    • Up to FY 2019-20
      31st July – for traders to whom Tax Audit is not applicable
      30th September – for traders to whom Tax Audit is applicable
    • FY 2020-21 Onwards
      31st July – for traders to whom Tax Audit is not applicable
      31st October – for traders to whom Tax Audit is applicable
  • Tax Audit: Since the income on the sale of unlisted stock is a Capital Gains Income, the applicability of tax audit under Section 44AB need not be determined.

Carry Forward Loss on Sale of Unlisted Shares

  • The investor can set off Short Term Capital Loss against both STCG and LTCG. They can carry forward the remaining loss for 8 years and set off against STCG and LTCG only.
  • The investor can set off Long Term Capital Loss against LTCG only. They can carry forward the remaining loss for 8 years and set off against LTCG only.

FAQs

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

You should file ITR-2 and report income from the sale of unlisted shares of a Domestic Company or Foreign Company as Capital Gains. You should pay income tax on it as per rates below:
– Long Term Capital Gain – 20% with indexation
– Short Term Capital Gain – slab rates
The assessee can set off LTCL with LTCG and STCL with both STCG and LTCG. The remaining loss can be carried forward for 8 years.

Can STT be paid on Unlisted Shares?

STT i.e. Securities Transaction Tax is the tax on the purchase and sale of securities listed on a recognised stock exchange in India. Thus, STT is not paid on Unlisted Shares. However, when a company offers shares to the public under IPO i.e. Initial Public Offering, such shares are later listed on the stock exchange. In such cases, STT is charged on the Unlisted Shares.

Income Tax on Foreign Shares

If a person resident in India has invested into shares listed in foreign countries, profit or loss on the sale of such shares should be reported in the ITR and the assessee must pay tax on this income. The tax treatment varies based on whether the shares are listed on a recognized stock exchange in India and whether STT on such shares is paid.

ITR for Residents with Foreign Income
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Income Heads for Trading in Foreign Shares

Capital Gains Income from Foreign Shares

Income from the sale of foreign shares is a Capital Gains Income as per the Income Tax Act. Foreign Shares is not listed on any recognized stock exchange in India. The period of holding is 24 months.

  • Long Term Capital Gain (LTCG): 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).
  • Short Term Capital Gain (STCG): 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).

Other Income from Foreign Shares

  • Dividend Income – 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.

Income Tax on Foreign Shares

Income Tax on Trading in shares of foreign countries is similar to the tax treatment of other capital assets. The following are the income tax rates on the sale of listed and unlisted foreign shares.

Type of Security Period of Holding Long Term Capital Gain

Short Term Capital Gain

Listed Foreign Share 24 months 20% with Indexation Slab Rates
Unlisted Foreign Share 24 months 20% with Indexation Slab Rates
  • Dividend Income on Foreign Shares is taxable at slab rates under the head ‘Income from Other Sources’.

Sale of Foreign Shares

  • Due Date
    • Up to FY 2019-20
      31st July – for traders to whom Tax Audit is not applicable
      30th September – for traders to whom Tax Audit is applicable
    • FY 2020-21 Onwards
      31st July – for traders to whom Tax Audit is not applicable
      31st October – for traders to whom Tax Audit is applicable
  • Tax Audit: Since the income on the sale of foreign shares is Capital Gains, the applicability of tax audit under Section 44AB need not be determined.
Check Tax Audit Applicability u/s 44AB
Check Income Tax Audit applicability u/s 44AB to file Tax Audit Report Form 3CB - 3CD with your Income Tax Return.
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Check Tax Audit Applicability u/s 44AB
Check Income Tax Audit applicability u/s 44AB to file Tax Audit Report Form 3CB - 3CD with your Income Tax Return.
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Carry Forward Loss for Sale of Foreign Shares

  • The investor can set off Short Term Capital Loss (STCL) against both Short Term Capital Gain (STCG) and Long Term Capital Gain (LTCG). They can carry forward the remaining loss for 8 years and set off against STCG and LTCG only.
  • The investor can set off Long Term Capital Loss (LTCL) against Long Term Capital Gain (LTCG) only. They can carry forward the remaining loss for 8 years and set off against LTCG only.

FAQs

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

The investor should file ITR-2 and report income from the sale of Foreign Shares as Capital Gains.
(a) Listed Foreign Shares
LTCG – 20% without indexation
STCG – slab rates
(b) Unlisted Foreign Shares
LTCG – 20% with indexation
STCG – slab rates
The details of Foreign Shares should be reported in Schedule FA i.e. Schedule Foreign Assets of the ITR. The assessee can set off LTCL with LTCG and STCL with both STCG and LTCG. The remaining loss can be carried forward for 8 years.

I am an Indian Resident. Do I need to pay Income Tax on income from the sale of foreign shares?

A Resident as per the Income Tax Act should pay tax on global income i.e. income in India and outside India. Thus, you must report income from the sale of foreign shares as Capital Gains Income and pay income tax on it as per rates below:
– Long Term Capital Gain – 10% without Indexation on sale of listed foreign shares and 20% with indexation on sale of unlisted foreign shares
– Short Term Capital Gain – pay tax at slab rates

Income Tax on ETF (Exchange Traded Funds) in India

Exchange-Traded Funds were launched in India in the year 2002. There are advantages of investing in ETF over shares and mutual funds. An investor can spread the risk by investing in the equities of multiple companies instead of investing in equity shares of a single company having a higher risk. Investing in ETFs is beneficial over mutual funds due to reduced expenses and higher liquidity.

What is ETF?

ETF i.e. Exchange Traded Fund is a basket of stocks that reflects the composition of an index like BSE Sensex or CNX Nifty. Thus, it holds all the stocks in the same proportion as held by the underlying index. It is an Index Fund that is listed and traded on a stock exchange just like a stock. The trading value is based on the Net Asset Value (NAV) of the underlying asset. It is a mutual fund that the investor can buy and sell on the stock exchange, unlike the normal mutual funds that the investor can buy and sell from the AMC. Income Tax on ETFs (Exchange Traded Funds) in India is similar to the tax treatment of mutual funds.

ITR for Capital Gains from Investment in ETFs
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Types of Exchange Traded Funds (ETF)

The different types of ETFs can be classified on the basis of the securities in which they invest. Following are types of ETF:

  • Equity ETF – ETFs that invest in equity shares are and other equity-related instruments.
  • Debt ETF – ETFs that invest in fixed return securities like bonds and debentures.
  • Gold ETF – ETFs that invest in physical gold assets.
  • Currency ETF – ETFs that invest in currency instruments.

Income Heads for Income from ETFs

Capital Gain on Sale of ETF (Exchange Traded Funds)

  1. Equity ETFs – Since these ETFs invest in equity-oriented instruments, the treatment is the same as equity shares.
    • Long Term Capital Gain (LTCG): Any gain arising on the sale of equity ETF held for more than 12 months is considered as Long Term Capital Gain.
    • Short Term Capital Gain (STCG): Any gain arising on the sale of equity ETF held for less than 12 months is considered as Short Term Capital Gain.
  2. Other ETFs – ETFs such as Gold ETF, International ETF, Debt ETF, etc has tax treatment similar to other capital assets.
    • Long Term Capital Gain (LTCG): Any gain arising on the sale of other ETF held for more than 36 months is considered as Long Term Capital Gain.
    • Short Term Capital Gain (STCG): Any gain arising on the sale of other ETF held for less than 36 months is considered as Short Term Capital Gain.
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Other Income from ETF (Exchange Traded Funds)

  • Interest Income
  • Dividend Income
    • In most cases, the dividend is reinvested in the scheme. However, the ETF Fund may decide to distribute dividends to the investors.
    • Up to FY 2019-20 – Exempt Income.
    • FY 2020-21 onwards – Taxable Income under the head Income From Other Sources (IFOS) at slab rates.

Income Tax on ETF (Exchange Traded Funds)

Income Tax on Trading in ETFs is similar to the tax treatment of mutual funds. Following are the income tax rates:

Type of ETF Period of Holding Long Term Capital Gain Short Term Capital Gain
Equity ETF 12 months 10% in excess of INR 1,00,000 under Section 112A 15% under Sec 111A
Other ETF 36 months 20% with Indexation Slab Rates

ITR Form, Due Date and Tax Audit Applicability for ETF Investors

  • Due Date
    • Up to FY 2019-20
      31st July – for traders to whom Tax Audit is not applicable
      30th September – for traders to whom Tax Audit is applicable
    • FY 2020-21 Onwards
      31st July – for traders to whom Tax Audit is not applicable
      31st October – for traders to whom Tax Audit is applicable
FY 2019-20: Due Date to file Income Tax Return for non-audit cases has been extended to 10th January 2021 and for audit cases to 15th February 2021
Tip
FY 2019-20: Due Date to file Income Tax Return for non-audit cases has been extended to 10th January 2021 and for audit cases to 15th February 2021

Carry Forward Loss for sale of ETFs

Gain or Loss on sale of ETFs is a Capital Gain or Capital Loss. Here are the rules for set-off and carry forward of loss on sale of ETFs.

  • The investor can set off Short Term Capital Loss (STCL) against both Short Term Capital Gain (STCG) and Long Term Capital Gain (LTCG). Also, they can carry forward the remaining loss for 8 years and set off against STCG and LTCG only.
  • The investor can set off Long Term Capital Loss (LTCL) against Long Term Capital Gain (LTCG) only. Further, they can carry forward the remaining loss for 8 years and set off against LTCG only.
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FAQs

How do I report income from sale of ETFs in the Income Tax Return i.e. ITR?

Traders should file ITR-2 and report income from sale of ETFs as Capital Gains.
– Equity ETF – Tax on LTCG is 10% in excess of INR 1 lac and tax on STCG is 15%.
– Other ETF – Tax on LTCG is 20% with indexation and tax on STCG is as per slab rates.
The investor can set off LTCL with LTCG and STCL with both STCG and LTCG, remaining loss can be carried forward for 8 years

Is ETF a better investment option than Mutual Funds?

Yes. ETFs are better than Mutual Funds for the following reasons:
1. The investor can buy and sell an ETF directly on the stock exchange, unlike the normal mutual funds.
2. Fees and investments in ETFs are lower than Mutual Funds since there is no fund manager to make investment decisions on behalf of the investor.
3. ETFs do not have a lock-in period and investors can sell it anytime. Mutual Funds like ELSS of 3 years reduces the liquidity of investors.

In the case of Mutual Funds, it is managed by an experienced Fund Manager who makes investment decisions for the investors. No such decision-maker is available in the case of ETFs.

How are Gold ETFs different from Gold Mutual Funds?

Gold ETFs are funds that invest in physical gold assets. Thus, asset base of the ETF is 90 to 100% gold. They are traded on exchanges and offer better liquidity.
Gold funds are mutual funds that invest in gold ETFs and other related assets. They do not invest in physical gold but Gold ETFs.

What is ETF Fund?

ETF is a basket of stocks that reflects the composition of an index like BSE Sensex or CNX Nifty. It is an Index Fund that is listed and traded on a stock exchange just like a stock. Therefore, it is a mutual fund that the investor can buy and sell on the stock exchange. IT on ETFs in India is similar to the tax treatment of mutual funds.

Income Tax on Bonds & Debentures

Bonds are government securities issued by the government of India to borrow money from investors. A debenture is an interest bearing bond or unsecured loan issued by a Company. If you have invested in bonds or debentures, you need to file your ITR and pay tax on the income. Sale of Bonds and Debentures is considered to be a Capital Gains Income. As per the Income Tax Act, both Bonds and Debentures are considered as Securities.

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Types of Bonds in India include government bonds, taxable and tax-free bonds, sovereign gold bonds, capital gains bonds by NHAI & REC, IRFC tax-free bonds, etc. Types of Debentures in India include non-convertible and convertible debentures, secured and unsecured debentures, redeemable and irredeemable debentures, registered and bearer debentures. SEBI (Securities Exchange Board of India) has prescribed guidelines for public issue of debentures under ICDR Regulations.

Income Heads for Income from Bonds & Debentures

Capital Gains on Sale of Bonds & Debentures

Period of Holding means the time period for which the assessee held the capital asset. Period of holding is counted from the date of acquisition (purchase) of an asset to the date of transfer (sale) of assets.

The period of holding is used to determine the nature of income on the sale of the capital asset i.e. Long Term Capital Gain or Short Term Capital Gain. Eg: If the assessee sells listed bonds within 12 months from the date of purchase, it is considered as a Short Term Capital Gain (STCG).

Type of Asset Period of Holding Capital Gains
Listed Bonds & Debentures Less than 12 months Short Term Capital Gains
Listed Bonds & Debentures More than 12 months Long Term Capital Gains
Unlisted Bonds & Debentures Less than 36 months Short Term Capital Gains
Unlisted Bonds & Debentures More than 36 months Long Term Capital Gains

IFOS Income from Bonds & Debentures

Interest Income from Bonds and Debentures is taxable under the head ‘Income from Other Sources‘ i.e. IFOS. The Interest Income is taxed at slab rates. If the assessee has incurred an expense (like commission or fees or remuneration etc) to realize such Interest, it can be claimed as a deduction from the Interest Income.

Interest Income from Tax-free bonds is fully exempt. Tax-free bonds are the bonds issued by public undertakings like National Highway Authority of India, Rural Electrification Corporation, NTPC Limited and Indian Railways, Indian Renewable Energy Development Agency, Housing and Urban Development Corporation, Power Finance Corporation and Rural Electrification Limited.

Income Tax on Bonds & Debentures

Income Tax on Trading in Bonds & Debentures is similar to the tax treatment of other capital assets. Following are the income tax rates:

Income Tax on Sale of Bonds & Debentures

Type of Asset Capital Gains Tax Rate
Listed Bonds & Debentures Short Term Capital Gains Slab Rate
Listed Bonds & Debentures Long Term Capital Gains 10% without Indexation
Unlisted Bonds & Debentures Short Term Capital Gains Slab Rate
Unlisted Bonds & Debentures Long Term Capital Gains 20% without Indexation

Note: Assessee cannot take benefit of indexation for the Long Term Capital Gain (LTCG) on the sale of Bonds or Debentures. However, the indexation benefit is available on Capital Indexed Bonds (issued by the Government) and Sovereign Gold Bonds (issued by the RBI under the Sovereign Gold Bond Scheme, 2015).

ITR for Capital Gains from Investment in Securities
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Income Tax on Other Income from Bonds & Debentures

Interest Income from Bonds & Debentures is taxed as per slab rates. Usually, the interest on bonds is taxable income. However, in the case of tax-free bonds, the interest income is exempt from tax.

An investor who invests in tax-free bonds should calculate the pre-tax yield before making the investment decision. To calculate the pre-tax yield, use this formula – ROI / (100-TR) * 100. (TR means Taxable Rate)

Example

Tax-Free Bonds has an interest rate of 5%. Let us assume that the investor falls in tax slab of 30%. Whether he/she invest in the tax-free bond?

Effective Tax Rate – 30% + 4% Cess = 31.2%
Calculate the pre-tax yield = 5% / (1-31.2%) = 7.16%

Thus, an investor who pays 31.2% tax, making an investment in a taxable bond with 7.16% interest is the same as investing in a tax-free bond with 5% interest.

Capital Gains Exemption under Section 54EC

An assessee who has sold Long Term Capital Asset like land or building or both can claim exemption by investing into NHAI or REC Bonds. The amount of exemption will be lower of:

  1. Cost of NHAI or REC Bonds
  2. Capital Gain on sale of land or building or both

ITR Form, Due Date and Tax Audit for Investors of Bonds & Debentures

  • ITR Form: Trader should file ITR-2 (ITR for Capital Gains Income) on Income Tax Website if income is treated as Capital Gains.
  • Due Date
    • Up to FY 2019-20
      31st July – for traders to whom Tax Audit is not applicable
      30th September – for traders to whom Tax Audit is applicable
    • FY 2020-21 Onwards
      31st July – for traders to whom Tax Audit is not applicable
      31st October – for traders to whom Tax Audit is applicable
FY 2019-20: Due Date to file Income Tax Return for both audit and non-audit cases has been extended to 30th November 2020
Tip
FY 2019-20: Due Date to file Income Tax Return for both audit and non-audit cases has been extended to 30th November 2020
  • Tax Audit: Since the income is treated as Capital Gains, the applicability of tax audit under Section 44AB need not be determined.

Carry Forward Loss from Sale of Bonds & Debentures

  • Short Term Capital Loss (STCL) can be set off against both Short Term Capital Gain (STCG) and Long Term Capital Gain (LTCG). Remaining loss can be carried forward for 8 years and set off against STCG and LTCG only.
  • Long Term Capital Loss (LTCL) can be set off against Long Term Capital Gain (LTCG) only. Remaining loss can be carried forward for 8 years and set off against LTCG only.

Example

For example, Mr. Rahul is a salaried individual and has invested in listed bonds and debentures in FY 2019-20. His total salary income for a year is INR 8,70,000. And has Short Term Capital Loss of Rs. 30000 and Long Term Capital Gain of INR 1,50,000.

Now in the above example, Rahul needs to file ITR-2 for FY 2019-20. And his total income and tax liability will be as follows:

Particulars Amount Amount
Salary Income   870000
Capital Gains    
Short Term Capital Loss 30000  
Long Term Capital Gain 150000  
Total Capital Gains after set-off of losses (taxed @10% without indexation)   120000
Total Taxable Income   990000
Tax at slab rate 86500  
Tax at special rate 12000  
Total Income Tax   98500
Health & Education Cess @4%   3940
Total Tax Liability   102440
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FAQs

How do I report income from sale of Bonds and Debentures in the Income Tax Return?

The investor should file ITR-2 and report income from the sale of Bonds and Debentures as Capital Gains.
– Listed Bonds & Debentures – Tax on LTCG is 10% without indexation and tax on STCG is as per slab rates.
– Unlisted Bonds & Debentures – Tax on LTCG is 20% without indexation and tax on STCG is as per slab rates.
The trader can set off LTCL with LTCG and STCL with both STCG and LTCG. The remaining loss can be carried forward for 8 years.

What is Income Tax on Capital Indexed Bonds issued by government and Sovereign Gold Bonds issued by RBI?

Tax on Interest on SGB Bond
It is taxable at slab rates under the head IFOS (Income from Other Sources). TDS on Interest is not applicable since they are government securities.

Tax Treatment on Sale or Redemption
A. Individual Investor
Capital Gain on Redemption of SG Bond by an individual investor is exempt from tax since the definition of transfer as per Section 47 of the Income Tax Act excludes such redemption.
If the individual investor transfers the SG Bond by selling it on the stock exchange, it is taxable as LTCG at the rate of 20% with indexation benefit.

B. Other Investors – The redemption or transfer of SG Bond in case of investors other than individuals is taxed at slab rates if STCG and at 20% with indexation benefit if LTCG.