Commodity Transaction Tax (CTT) – Overview, Rates, Tax Implications

The finance minister, Mr. P Chidambram introduced CTT i.e. Commodity Transaction Tax under Budget 2013 to tax the transactions of commodities trading. This tax was levied with the intention to increase the government revenue and keep a check on speculative transactions. CTT was introduced in Finance Act 2013 and was effective from 1st July 2013.

What is Commodity Transaction Tax (CTT)?

Commodity Transaction Tax i.e. CTT was introduced by the government to tax the trading of non-agricultural commodities. Initially, there was no tax on commodities trading. However, there was no difference between derivative trading in the securities market and derivative trading in the commodities market, only the underlying asset was different. Hence, CTT was introduced to equalise the trading rules for equity trading and commodities trading.

While Securities Transaction Tax i.e. STT is levied on securities trading, Commodities Transaction Tax i.e. CTT is levied on commodities trading.

Commodities on which CTT is levied

CTT is levied on the seller and buyer doing a commodity transaction through a futures contract. It is calculated on the trade price and depends upon the size of the contract.

In the case of agricultural commodities, CTT is exempt. In the case of non-agricultural commodities such as metals (copper, silver, gold, zinc, aluminium, etc) and energy products (crude oil and natural gas), the CTT rate is the same as equity futures i.e. 0.01% of the trade price.

Commodity Transaction Tax (CTT) Rates

CBDT issued a notification with the CTT rates that MCX must charge on the transactions executed on the stock exchange. Below are the CTT Rates:

Taxable Commodity Transaction Charged on CTT Rate Payable By
Sale of a commodity derivative (except exempt agricultural commodities) Trade Price 0.01% Seller
Sale of option on commodity derivative (option not exercised) Option Premium 0.05% Seller
Sale of option on commodity derivative (option exercised) Settlement Price 0.0001% Purchaser

List of Agricultural Commodities Exempt from CTT

Tax Implications on CTT paid on Commodity Trading

Commodities Trading is considered to be a Non-Speculative Business Income. Thus, a commodities trader must file ITR-3 to report such business income and pay income tax at slab rates. Further, as per the Budget Speech, trading in commodity derivatives is not a speculative transaction and the trader can claim CTT as a valid business expense.

CTT 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

What is the difference between STT and CTT?

STT i.e. Securities Transaction Tax is levied on trading in equity, equity derivatives, and mutual funds. CTT i.e. Commodity Transaction Tax is levied on trading in commodity derivatives. While CTT is levied on the sell value of the transaction, STT in some cases is applicable on both the buy and sell value of the transaction.

How is CTT charged on Commodity Trading?

Commodity Transaction Tax i.e. CTT is levied on non-agricultural commodity trading. Agricultural commodity trading is exempt from CTT. CTT at 0.01% is levied on the sell value of trade in the case of futures trading. CTT at 0.05% is levied on the sell value of trade in the case of options trading.

Who is liable to pay CTT i.e. Commodity Transaction Tax?

The buyer or seller is liable to pay CTT to the broker on the commodity trading transactions. The broker deposits the same with MCX (Multi Commodity Exchange) which is an exchange for commodities trading.

Dividend Stripping – Overview, Tax Implications, Example

Up to FY 2019-20, Dividend Stripping was a common practice amongst investors to save taxes on capital gains income and earn tax-free dividends. The investors used the practice of dividend stripping to evade taxes by booking loss for set off against capital gains income and earn tax-free dividends. Under Budget 2020, the finance minister introduced Section 94(7) in the Income Tax Act to discourage dividend stripping. Further, they also abolished DDT (Dividend Distribution Tax), and thus shareholders now need to pay tax on dividend income.

What is Dividend Stripping?

When an investor buys equity shares or units of a mutual fund knowing that the company is planning to declare a dividend and sells the shares or units after receiving the dividend, this practice is known as Dividend Stripping. Here are the stages of dividend stripping:

  • Investor has news of a company set to declare dividends to existing shareholders
  • Investor buys shares or mutual fund units of the said company
  • Under the dividend issue, the investor receives dividends on the shares or units held
  • The investor sells the shares or units at the reduced share price post dividend and thus incurs a short term capital loss

Benefits of Dividend Stripping for the Investor

Below are benefits from bonus stripping for an investor:

  • The investor can set off STCL on the sale of shares or units against other capital gains income, both STCG and LTCG, and thus leads to a reduction in tax liability
  • The investor earns tax-free dividends

Example of Dividend Stripping

Mr. A came to know about the news of the dividend declaration by Company XYZ of INR 60 per share. Mr. A buys 50 shares at INR 200 thus having invested INR 10,000. The Company declares and pays dividends of INR 50 per share and pays Mr. A INR 2500 (50*50).

After the declaration of the dividend, the share price drops to INR 150. Mr. A sells the 50 shares and incurs a Short Term Capital Loss (STCL) of INR 2,500.

  • STCL = 7,500 (50 shares * 150 per share) – 10,000 (50 shares * 200 per share) = -2,500
  • Dividend Income = 3,000 (50 shares * 60 per share)

Up to FY 2019-20, such dividend income was exempt from tax in the hands of the investor.

As a result of Dividend Stripping, Mr. A got the following benefits:

  • Earned Net Profit of INR 500 on the entire transaction
  • The STCL incurred on the sale of shares is available for set-off against other capital gains, both STCG and LTCG
  • The dividend of INR 3,000 is exempt from tax under 10(34)
  • Earned profits without paying taxes

After Budget 2020, the Dividend from a domestic company became a taxable income in the hands of the investor and taxed at slab rate. However, in such a case, investors can still use the practice of dividend stripping for adjusting STCL with other capital gains income with higher tax rates.

Section 94(7) of Income Tax Act

To avoid the practice of tax evasion using Dividend Stripping, the finance minister introduced Section 94(7) under Budget 2020. In the same Budget, the finance minister abolished DDT (Dividend Distribution Tax) and thus it became a taxable income for the shareholders.

As per Section 94(7) of the Income Tax Act, if:

  • An investor buys securities or units within a period of 3 months prior to the record date of dividend declaration AND
  • The investor sells such securities within a period of 3 months or sells units within a period of 9 months after the record date of dividend declaration

Any loss incurred on the above transaction shall be ignored for the purpose of calculating capital gains. Thus, the investor will not be able to book the loss on such a sale transaction and cannot be set off against capital gains income to the extent of the dividend earned.

In the above example, Mr. A must ignore the STCL of INR 2,500 for the purpose of tax calculation. Mr. A will not be able to set off such a loss against capital gains income. Further, the income tax on dividend income of INR 3,000 would be as per slab rates.

FAQs

What is Dividend Stripping?

Dividend Stripping is a practice where the investor buys shares of a company or mutual fund units on knowing about dividend declaration, earns tax-free dividends on such shares or units, and sells them later to adjust short term capital gains (STCL) against other taxable capital gains income (STCG and LTCG). This practice is used to earn tax-free income and reduce tax liability by adjusting losses.

Is Dividend Stripping legal in India?

Dividend Stripping is not legal in India. Section 94(7) of the Income Tax Act lays down conditions to check dividend stripping in the case of equity shares and units of mutual funds in India.

How is Dividend Stripping different from Bonus Stripping?

Dividend Stripping is a practice of earning tax-free dividends and saving taxes by adjusting losses against capital gains income by buying shares of a company likely to announce dividends.
Bonus Stripping is a practice used for saving taxes by adjusting losses against capital gains income by selling shares of a company likely to issue bonus shares. Further, it also aims at earning long-term capital gains on selling bonus shares and paying no tax or less tax on such income.
Both Bonus Stripping and Dividend Stripping are used to evade taxes but in different ways. As per the Income Tax Act, while Section 94(7) keeps a check on dividend stripping, Section 94(8) keeps a check on bonus stripping.

Bonus Stripping and Section 94(8) Income Tax Act

Bonus Stripping was a common practice amongst investors to save taxes on capital gains income. Bonus Stripping means buying shares of a company planning for a bonus issue and selling the original shares after receiving bonus shares to earn more profits and pay less tax. However, under Budget 2022, the government made an amendment to Section 94(8) of the Income Tax Act to stop the practice of Bonus Stripping. The amended provision shall be applicable from 1st April 2023. As a result, bonus stripping would not be an option to evade taxes anymore.

What is Bonus Stripping?

When an investor buys shares of a company that is planning to announce issues of bonus shares and sells the original shares after receiving shares under the bonus issue, this practice is known as Bonus Stripping. Here are the stages of bonus stripping:

  • Investor has news of a company set to issue bonus shares to existing shareholders
  • Investor buys shares of the said company
  • Under the bonus issue, the investor receives bonus shares as per the bonus issue ratio
  • Investor sells the original shares after the bonus issue at the reduced share price after the bonus and thus incurs a short term capital loss
  • The investor sells the bonus shares after a year and thus earns a long term capital gain

Benefits of Bonus Stripping for the Investor

The investor gets the following benefits from bonus stripping:

  • The STCL on the sale of original shares can be set off against other capital gains income, both STCG, and LTCG, and thus leads to a reduction in tax liability
  • The LTCG on the sale of bonus shares is exempt up to INR 1 lac and taxable at a rate of 10%
  • Out of the entire transaction, the investor ends up earning more profits and paying less tax on it

Example of Bonus Stripping

Mr. A came to know about the news of the bonus issue by Company XYZ. Mr. A buys 50 shares at INR 1000 thus having invested INR 50,000. Under the bonus issue with a ratio of 1:1, the company issues 50 shares to Mr. A as bonus shares. Mr. A now holds 100 shares valuing INR 1,00,000.

As a result of the bonus issue, the share price drops to INR 500. Mr. A sells the original 50 shares and incurs a Short Term Capital Loss (STCL) of INR 25,000. In the next financial year, Mr. A sells the bonus 50 shares at the rate of INR 1200 and earns a Long Term Capital Gain (LTCG) of INR 60,000 considering the cost of acquisition of bonus shares is zero.

  Holdings Buy Price Sell Price Profit/Loss Type
Original Shares 100 50000 25000 -25000 STCL
Bonus Shares 100 0 60000 60000 LTCG

 

As a result of Bonus Stripping, Mr. A got the following benefits:

  • Earned Net Profit of INR 35,000 on the entire transaction
  • The STCL incurred on the sale of original shares was set off against other capital gains, both STCG and LTCG
  • The LTCG of INR 60,000 is exempt from tax under Section 112A
  • Earned profits without paying taxes

Budget Amendment – Section 94(8) of Income Tax Act

To avoid the practice of tax evasion using Bonus Stripping, the finance minister introduced an amendment to Section 94(8) under Budget 2022.

The existing Section 94(8) of the Income Tax Act kept a check on the bonus stripping transactions in the case of mutual fund units. Under Budget 2022, Section 94(8) was amended with effect from 1st April 2023. As per the amendment, the word ‘units’ shall be substituted by the word ‘securities and units’. Thus, this section now applies to both units of mutual funds and equity shares too.

As per Section 94(8), if:

  • An investor buys mutual fund units within a period of 3 months prior to the record date of the bonus issue AND
  • The investor sells all or any of the original shares within a period of 9 months after the record date of the bonus issue

Any loss incurred on the above transaction shall be ignored for the purpose of calculating capital gains. Thus, the investor will not be able to book the loss on such a sale transaction. Further, such loss would be considered as a purchase price for the bonus shares acquired.

In the above example, the STCL of INR 25,000 will be ignored for purpose of tax calculation. Mr. A will not be able to set off such a loss. Instead, INR 25,000 would be treated as the cost of acquisition for the bonus shares sold.

FAQs

What is Bonus Stripping?

Bonus Stripping is the practice of buying shares of a company or units of a mutual fund with an intention to acquire bonus shares or units as a result of a bonus issue. The investor then sells the original shares or units to set off loss against other capital gains. Further, the investor sells bonus shares to earn long-term capital gains and pay tax at a reduced rate of 10%. This practice of earning profits from bonus issue but paying no tax or reduced tax on it is called bonus stripping.

Is Bonus Stripping legal in India?

Bonus Stripping is not legal in India. Section 94(8) of the Income Tax Act lays down conditions to check bonus stripping in the case of equity shares and units of mutual funds in India.

What announcement was made under Budget 2022 related to Bonus Issue?

Under Budget 2022, an amendment was made to Section 94(8) of the Income Tax Act. The word ‘units’ was substituted by ‘securities and units’. Thus, Bonus Stripping in the case of both equity shares and units of mutual funds can now be restricted through Section 94(8). This amendment would come into effect from 1st April 2023.

Income Tax on Gold – Investment Types, Rates, Exemptions

Investing in gold is very popular amongst investors. Based on their financial goals, individuals invest money into different forms of gold. Physical gold is the oldest form of gold investment. However, in recent times there are multiple options available for gold investment. Investors can invest in jewellery, gold coins, gold ETFs, SGB, digital gold, gold derivatives, etc. Different forms of gold investment have different tax treatments. Let us understand the tax implications on types of Gold Investments in India.

Income Tax on Physical Gold

Investment in Physical Gold means gold in the form of jewellery, bars, coins, or biscuits. Below are the tax provisions on the sale of physical gold.

  • Income Head – Income on the sale of physical gold is income from Capital Gains. If the taxpayer sells physical gold after holding it for more than 3 years, it is a Long Term Capital Gain (LTCG). If the taxpayer sells physical gold after holding it for less than 3 years, it is a Short Term Capital Gain (STCG).
  • Tax Rate – Taxpayer should pay income tax on STCG at slab rates and on LTCG at 20% with the indexation benefit.
On purchase of physical gold, the buyer must pay a GST of 3%. Further, on purchase of physical gold of more than INR 2 lacs in cash, the buyer must deduct and deposit TDS at rate of 1%.
Tip
On purchase of physical gold, the buyer must pay a GST of 3%. Further, on purchase of physical gold of more than INR 2 lacs in cash, the buyer must deduct and deposit TDS at rate of 1%.

Income Tax on Paper Gold

Paper Gold comprises Gold ETFs, Gold Mutual Funds, and Sovereign Gold Bonds (SGB). In the case of paper gold, the investor holds gold on paper but not physically. Below are the tax provisions for paper gold.

Income Tax on Gold Mutual Funds and Gold ETFs

  • Income Head – Income on the sale of gold mutual funds or gold ETFs is income from Capital Gains. If the taxpayer sells gold mutual funds or ETFs after holding them for more than 3 years, it is a Long Term Capital Gain (LTCG). If the taxpayer sells gold mutual funds or ETFs after holding them for less than 3 years, it is a Short Term Capital Gain (STCG).
  • Tax Rate – The taxpayer should pay income tax on STCG at slab rates and on LTCG at 20% with the indexation benefit.

Income Tax on Sovereign Gold Bonds (SGBs)

  • Interest on SGB i.e. Sovereign Gold Bond is an IFOS income and taxed at slab rates
  • Income on sale of SGB on expiry of 8 years is exempt from tax
  • Income on sale of SGB after 5 years but before the expiry of 8 years is a Long Term Capital Gain and the tax rate is 20% with the benefit of indexation
  • Further, Income on the sale of SGB after 12 months but before 5 years is a Long Term Capital Gain and the tax rate is 10% without the benefit of indexation
  • Income on the sale of SGB within 12 months is a Short Term Capital Gain and the tax is payable at slab rates

Income Tax on Digital Gold

Digital Gold means investing in gold through mobile wallets like google pay, Paytm, ET Money, etc. The investor does not hold physical gold and has the ability to invest in gold through online mobile wallet applications. Below are the tax provisions on the sale of digital gold.

  • Income Head – Income on the sale of digital gold is an income from Capital Gains. If the taxpayer sells digital gold after holding it for more than 3 years, it is a Long Term Capital Gain (LTCG). If the taxpayer sells digital gold after holding it for less than 3 years, it is a Short Term Capital Gain (STCG).
  • Tax Rate – The taxpayer should pay income tax on STCG at slab rates and on LTCG at 20% with the indexation benefit.

Income Tax on Gold Derivatives

Gold derivatives are derivative contracts where the underlying asset is gold. An investor can buy gold derivatives from the commodities market. The tax treatment on the trading of gold derivatives is the same as income tax on commodity F&O trading.

  • Income Head – Income on the sale of gold derivatives is a Non-Speculative Business Income. The taxpayer can claim expenses against such income and compute taxable profit/loss by preparing a P&L account.
  • Tax Rate – Non-Speculative Business Income is taxable at slab rates.

Income Tax on Gift or Inheritance of Gold

Gifting or inheriting gold is a common practice in India. Below are the provisions for income tax on gift of gold:

  • Tax treatment for Receiver – Gold received in form of a gift or inheritance from a relative (spouse, children, parents) is exempt from tax as per Section 56(2) of the Income Tax Act. However, gold received as a gift or inheritance from any other person in excess of INR 50,000 is taxable under IFOS at slab rates. A gift in form of gold received on the occasion of marriage is exempt from tax. Further, if the taxpayer sells the gold received as a gift or inheritance, it is an income from capital gains and taxed at applicable rates
  • Tax treatment for Sender – The sender is liable to report income on the transfer of gold and pay tax at applicable rates as per the provisions mentioned above.

Income Tax Rules on Gold for NRIs

Taxpayers holding the status of NRI i.e. Non-Resident Indian as per the Income Tax Act can invest in all forms of gold investments except SGB (Sovereign Gold Bonds). The rules for taxation on the sale of gold investments in the case of NRI are the same as in the case of a Resident.

However, NRIs must pay TDS on the redemption of Gold ETF or Gold Mutual Funds:

  • 20% TDS on redemption of Long Term Gold ETFs and Mutual Funds
  • 30% TDS on redemption of Short Term Gold ETFs and Mutual Funds

ITR Form & Treatment of Loss on Sale of Gold

The taxpayer must file the following ITR on the income tax website to report the income from the sale of gold:

  • File ITR-2 to report income from capital gains on the sale of physical gold, digital gold, and paper gold
  • File ITR-3 to report non-speculative business income on the sale of gold derivatives

Following are the rules for set off and carry forward of loss on the sale of gold investments:

  • Short Term Capital Loss – The taxpayer can set off STCL against STCG and LTCG. They can carry forward the remaining loss for 8 years and set off against STCG and LTCG in future years.
  • Long Term Capital Loss – The taxpayer can set off LTCL against LTCG only. They can carry forward the remaining loss for 8 years and set off against LTCG in future years.
  • Non-Speculative Business Loss – In the current year, the taxpayer can set off this loss against all incomes except Salary. They can carry forward the remaining loss for 8 years and set off against business incomes only.

How to Save Taxes on LTCG from Investment in Gold?

Taxpayers having income from capital gains can save taxes by investing in specified assets as per the exemptions under Capital Gains. If a taxpayer has LTCG income from the sale of gold, here are the available options to avail of exemption if he/she fulfills the specified conditions as per the relevant section:

  • Section 54EE – Exemption available on the sale of any long-term capital asset i.e. sale of gold and investing into units of a fund notified by the Central Government to fund startups.
  • Section 54F – Exemption available on the sale of a long-term capital asset i.e. sale of gold (other than residential house property) and investing into a residential house property

FAQs

Do I need to pay tax on the sale of gold?

Yes. Gold in form of physical, digital or paper gold is considered a Capital Asset. The holding period to determine the nature of gain is 3 years. You must compute capital gains and pay tax at 20% on LTCG with indexation benefit or slab rates on STCG.

What is the tax rate on the sale of gold ETF?

Gold ETF is treated as a Capital Asset just like other ETFs and Mutual Funds. The tax rate on Gold ETF held for more than 3 years is 20% with the benefit of indexation and on gold ETF held for up to 3 years is at slab rates.

Are gold derivatives taxed in the same manner as physical gold?

No. Gold derivatives are taxed as Commodity derivatives and thus the tax treatment is different than in the case of physical gold. Income on the sale of gold derivatives is treated as a non-speculative business income and taxed at slab rates. The taxpayer must prepare P&L and Balance Sheet and report them in ITR-3.

I inherited gold from my parents. Do I need to pay tax on it and report it in ITR?

Gold inherited from relatives is exempt from tax as per Section 56(2) of the Income Tax Act. The definition of relative includes spouse, parents, and children. You should report it as Exempt Income under Schedule EI of the ITR and need not pay tax on it.

I received gold as a gift at my wedding. Do I need to pay tax on it and report it in ITR?

Gift received from relatives is exempt from tax as per Section 56(2) of the Income Tax Act. Gift received from non-relatives is taxable if the amount is in excess of INR 50,000. However, any gift received on the occasion of wedding is exempt from income tax. Thus, you can report it as exempt income in the ITR and need not pay tax on it.

Sovereign Gold Bond – Taxation on SGB

What is SGB – Sovereign Gold Bond?

SGB i.e. Sovereign Gold Bond are bonds that the government of India issues 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. The tenure for the issue of SGB bonds is 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. The definition of transfer of a capital asset as per Section 2(47) of the Income Tax Act covers both redemption and sale of SGB. While the 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 excludes deduction of tax on payment of interest 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 – The definition of transfer of capital asset excludes redemption of SGB. Thus, the Capital Gain on Redemption of Sovereign Gold Bond by an Individual Investor is exempt from tax.
  • 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 or 10% without indexation. However, if the SGB is held for up to 12 months, it is taxed at the slab rates applicable to the taxpayer.

Other Investors

In the case of investor other than individuals, the LTCG tax is at 20% with indexation benefit or at 10% without indexation benefit on transfer or redemption of SGB.

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.

FAQs

What is the benefit of investing in 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?

If the investor buys SGB from the secondary market and redeems it after holding it until maturity, here is the tax treatment:
– 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.

Tax on Gifted Shares & Securities

A gift is a sum of money or movable property or immovable property received without consideration or inadequate consideration. Section 56(2) of the Income Tax Act lays down provisions for tax on gifted shares. 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 is a movable property. Trading platforms like Zerodha have built a platform to gift stocks, ETFs, and gold bonds after the introduction of e-DIS (electronic delivery instruction slip) by CDSL. Thus, it is now possible to gift stocks 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.

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, here are important points to consider:
    • 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.

Example – Tax on Gifted Shares

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 gift deed as proof of the gift transaction. In cases of scrutiny, the taxpayer can use this document 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.

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 registers 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.

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 the sale of goods or INR 20 Lakh (INR 10 Lakh for special category states) for the sale of services. As per Section 22 of the 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 mean 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 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 is important to note that if a broker is earning brokerage income from securities trading, GST registration is mandatory if such brokerage exceeds the threshold limit.

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 include 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

Do 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, the finance minister introduced TDS under Section 194 and Section 194K 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 115-O of the Income Tax Act. Since the DDT is calculated on Gross Dividend, the effective rate comes to 17.65%.

Example on DDT

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%.

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 the 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 to calculate the Long Term Capital Gain on shares.

A trader having income from trading in securities and reporting 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.

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 trader need not determine the applicability of tax audit under Section 44AB of the Income Tax Act.

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 taxpayer can set off LTCL with LTCG and STCL with both STCG and LTCG. Further, the taxpayer can carry forward the remaining loss 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.