Tax on IPO – Initial Public Offering

What is an IPO?

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

Why does a Company go Public?

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

Process of Applying for an IPO?

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

Tax on IPO

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


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

List of IPO for the Year 2021

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

FAQs

Is an IPO a taxable event?

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

How long after IPO can you sell?

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

Capital Asset – Definition and Types

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

What is a Capital Asset?

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

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

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

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

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

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

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

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

FAQ

How are capital gains taxed?

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

Why is period of holding important?

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

Capital Gain Tax on Sale of Property/Land

Immovable Property or Land is considered to be a Capital Asset as per the Income Tax Act. A taxpayer who sells an immovable property or land should report such income or loss as Capital Gains it in the Income Tax Return and pay tax on it at the applicable rate. Capital Gain Tax on the sale of property or land is determined on the basis of the nature of the long term or short term.

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Capital Gain on Sale of Property / Land

The Capital Gain can be of two types depending on the period of holding of the capital asset.

  1. Long Term Capital Gain (LTCG): If the taxpayer sells an immovable property or land 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).
  2. Short Term Capital Gain (STCG): If the taxpayer sells an immovable property or land 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).
The holding period for immovable property i.e. land, building and house property was 36 months up to FY 2016-17. However, the period of holding is reduced to 24 months FY 2017-18 onwards.
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The holding period for immovable property i.e. land, building and house property was 36 months up to FY 2016-17. However, the period of holding is reduced to 24 months FY 2017-18 onwards.

Income Tax on Sale of Immovable Property

Income Tax on the sale of immovable property i.e. land, building, or house property is similar to the tax treatment of other capital assets.

Calculation of Long Term Capital Gain tax on sale of property in India

The income tax rate for LTCG on sale of property in India is 20% with Indexation benefit. Using the indexation benefit, the taxpayer can adjust the cost of the asset with the CII (Cost Inflation Index) List issued by the Income Tax Department. The Indexed Cost of Acquisition is used to calculate the Capital Gains. The cost of Improvement is the expense incurred by the taxpayer for making addition or improvements to the capital asset. The taxpayer can also calculate the Indexed Cost of Improvement.

  Particulars Amount
  Sale Consideration XXXX
Less Transfer Expenses (XXXX)
Less Indexed Cost of Acquisition (XXXX)
Less Indexed Cost of Improvement (XXXX)
Less Exemption u/s 54, 54EC, 54F (XXXX)
  Long Term Capital Gain XXXX
  • Sale Consideration = In the case of immovable property, as per Section 50C of Income Tax Act, sale consideration should be the sale value of capital asset or value adopted by stamp duty valuation authority whichever is higher.
  • Transfer Expenses = expenses incurred exclusively for the sale of the capital asset.
  • Indexed Cost of Acquisition = Cost of Acquisition * (CII of year of Sale / CII of year of Purchase)
  • Indexed Cost of Improvement = Cost of Improvement * (CII of year of Sale / CII of year of Improvement)

Calculation of Short Term Capital Gain tax on sale of property in India

The Short Term Capital Gain is taxed as per the slab rates. There is no indexation benefit in the case of a Short Term Capital Gain. Further, the exemption under Section 54 to 54F is also not available. Thus, the Capital Gain is calculated on the basis of the cost of acquisition, cost of improvement, and transfer expenses.

  Particulars Amount
  Sale Consideration XXXX
Less Transfer Expenses (XXXX)
Less Cost of Acquisition (XXXX)
Less Cost of Improvement (XXXX)
  Short Term Capital Gain XXXX

Carry Forward Loss on Sale of Immovable Property

  • The taxpayer 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 taxpayer 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.

Capital Gains on Sale of Property before Possession

Let’s understand the situation first: You have booked a property which is still under construction. So essentially you have acquired the rights for the under-construction property and not the property itself. Now before the construction completes, you want to sell the rights. Now the first question that comes to your mind is how do I calculate the capital gains for the same and what would be my tax liability?

Example

Darshil paid INR 20 Lakh on 01/01/2012 to book a house in a housing scheme. The scheme will give possession of the property on 01/01/2016. Darshil finds a better scheme and wants to sell the rights in this scheme. The taxability of the capital gains will depend on the time gap between the date of booking of the property and the date of agreement to transfer the rights in the under-construction property.

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Various Situations

  1. If Darshil transfers the rights before 01/01/2015
    • Then it will result in short term capital gains since the holding period is less than 36 months.
    • Indexation benefit is not applicable
    • The capital gains will be taxable at the normal slab rate applicable to the individuals.
    • Since it will be short term capital gains, no capital gain exemption is available to save the capital gains tax.
  2. If Darshil transfers the rights after 01/01/2015
    • Then it will result in long term capital gains since the holding period is more than 36 months
    • Indexation benefit is applicable to the amount payable to the builder, stamp duty, and also registration fees.
    • The capital gains will be taxable at 20%
    • Since it will be long term capital gains, the exemption under section 54F and Section 54EC will be available.
    • You can not claim the exemption under section 54 because the exemption is for the purchase of new residential property against the sale of existing residential property. Here what you are selling is a right to acquire a residential house and not the residential house itself. Many people treat the sale of an under-construction property at par with a residential house for the purpose of claiming long term capital gain exemption which is incorrect and may result in scrutiny.
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ITR Form & Due Date for Income from Sale of Immovable Property

  • ITR Form: Taxpayer should file ITR-2 (ITR for Capital Gains Income) on Income Tax Website since income on the sale of immovable property such as land, building, or house property is Capital Gains.
  • Due Date – 31st July of the Assessment Year
    • Up to FY 2019-20 – 31st July
      31st July – for taxpayers to whom Tax Audit is not applicable
      30th September – for taxpayers to whom Tax Audit is applicable
    • FY 2020-21 Onwards
      31st July – for taxpayers to whom Tax Audit is not applicable
      31st October – for taxpayers 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.

FAQs

What is section 54F under capital gains?

Section 54F, exemption of capital gain is made available in the situation of long term capital assets transfer against the investment one makes in a residential house. he capital gain that arises for transferring any long term capital assets that is other than the residential house.

How can I save capital gains tax on the sale of my property?

By Investing in Capital Gains Account Scheme and while filing your return on Income Tax Portal you can claim this as an exemption from your capital gains, you don’t have to pay tax on it. However, you must invest this money you have deposited within the period specified by the bank, if you fail to do so, your deposit shall be treated as capital gains.

How do you calculate long term capital gains on sale of property?

Long term capital gain is calculated as the difference between net sales consideration and indexed cost of the property. The benefit of indexation is allowed to set off the impact of inflation from gains made on the sale of the property so that the actual gains on the property will be taxed.

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.

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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.
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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.

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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
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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.

Compliance portal: Tax liability from Sale of Immovable property

The capital gain arising from the sale of immovable property of a capital asset is subjected to tax. Capital Gain tax u/s 45 of the Income Tax Act is to be levied on the sale. However, Capital gains are of two types i.e long term and short term. The tax liability will differ depending upon the type of capital gain.

Taxpayers who receive an SMS or any communication via call or email from ITD are likely to face some verification issues in their ITRs. Taxpayers can receive the SMS for three reasons:

  1. Not filed ITR or The ITR is not filed in the given assessment year and has potential tax liability pending.
  2. Details provided by taxpayers and Information received to the ITD don’t match for that particular assessment year.
  3. Significant transactions get reported to the Income Tax department during a financial year which is considered abnormal or out of line with the profile of the taxpayer.

Taxpayers who have received any such verification issue needs to submit a response on those issues raised. The response has to be submitted online by logging into the compliance portal.

Verification issue in the computation of tax liability from Sale of Immovable Property

Code Description Response
A1 Total receipts as per taxpayer pertaining to the above information Amount + Remarks
A2 Value adopted or assessed for the purpose of payment of Stamp Duty Amount + Remarks
A3 The value is taken for computation of capital gains Amount + Remarks
A4 Less: Amount relating to another year/PAN  PAN year-wise list + Remarks
A5 Less: Amount covered in other information Amount + Remarks
A6 Less: Exemption/Deduction/Expenditure/ Set off of Loss Exemption/Deduction wise list + Remarks
A7 Income/Gains/Loss (A1-A2-A3-A4) Amount + Remarks

A1- Total receipts as per the taxpayer pertaining to the above information.

The gross value of the receivables/received payments against the transfer of the property is to be mentioned.

A2- Value adopted or assessed for the purpose of payment of stamp duty

The amount of stamp duty paid or payable is to be mentioned here. If there is no stamp duty value then the field should be left blank. As per section 50C or 43CA, if the sale amount is lower than the value taken for payment of stamp duty is to be considered for computing income.

A3- Value taken for computation of Capital Gains.

The value that has been considered for the computation of income is to be mentioned. If value taken for payment of stamp duty is higher than the sale amount and it is claimed that the former value exceeds the fair market value, then appropriate remarks are to be stated under the remarks section.

A4- Amount relating to another year/PAN.

If part of the income/receipts relates to someone else’s PAN or is considered for some other year then the List of details of such income is to be mentioned as per the table below:

A5- Amount repeatedly covered:

 If any amount is mistakenly covered twice then it should be mentioned under the Remarks section of the previous table. This will nullify the repeated Income/Gains/Loss covered.

A6- Exemption/Deduction/Expenditure/Set off of loss:

This section has to include a list of all the available allowances which are exempt. The taxpayer needs to select the correct category from the drop-down list as under:

  • Agricultural Land outside specified limits
  • Capital Gains:
    • Cost of Acquisition u/s 48
    • Cost of Improvement u/s 48
    • Expenditure incurred wholly and exclusively in connection with transfer u/s 48
    • Deductions from Capital Gains u/s 54/54B/54D/54EC/54EE/54F/54G/54GA/54GB
  • Set off of Loss
  • Others

The details are to be submitted as per the table mentioned below:

A7- Income/Gain/Loss:

This section includes the self-computation of income from house property chargeable to tax A5=(A1-(A2+A3+A4)). If your income computation exceeds the minimum of 2.5 lakh then you should file your ITR.

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FAQs

Is it necessary to login to Compliance Portal? What happens if I don’t log in?

Yes, it is advisable to log in to the compliance portal. If a taxpayer doesn’t log in he/she will not be able to respond to the issues raised.

What is an additional query request?

Upon examining the online response submitted by the taxpayer, ITD can raise an additional query request to seek further information/clarification from the taxpayer. The taxpayer needs to respond to the additional query request as well.

How will the taxpayer come to know about pending e-verification?

If there are any e-Verification issues it will be pushed to the compliance portal for e-verification, Email and SMS will be sent to the taxpayer informing about the issue raised. Taxpayers then need to respond to those issues raised.

Compliance portal: Tax liability from Purchase of Immovable property

A taxpayer who has purchased an immovable property(from undisclosed income) might receive a query on the compliance portal. As per the Income Tax Act, any unexplained investment is considered as Income for that Financial Year u/s 69 and 69B.

Important aspects that can be considered, for the query on compliance portal regarding purchase of immovable property, are as follow:

  • If a person receives an immovable property without consideration or with disclosed consideration is lower by more than Rs. 50,000/- then the stamp valuation, the difference will be considered as an income in the hands of the purchaser.
  • If the sale has not been executed but the agreement of the sale is prepared, provisions of section 50C and 56(2) will apply.

Taxpayers who receive an SMS or any communication via call or email from ITD are likely to face some verification issues in their ITRs. Taxpayers can receive the SMS for three reasons:

  1. Not filed ITR or The ITR is not filed in the given assessment year and has potential tax liability pending.
  2. Details provided by taxpayers and Information received to the ITD don’t match for that particular assessment year.
  3. Significant transactions get reported to the Income Tax department during a financial year which is considered abnormal or out of line with the profile of the taxpayer.

Taxpayers who have received any such verification issue needs to submit a response to those issues raised on the compliance portal. The response has to be submitted online by logging into the compliance portal.

Verification issue in the computation of tax liability on the Purchase of Immovable Property

Code Description Response
A1 Correct Information Value Amount + Remarks
A2 Out of earlier income or savings Amount + Remarks
A3 Out of receipts exempt from tax Exempt income-wise list
A4 Received from identifiable persons (without PAN) PAN wise list
A5 Received from identifiable persons (without PAN) Person wise list 
A6 Received from un-identifiable persons Nature of transaction wise list 
A7 Others Amount + Remarks
A8 Unexplained amount A1- (A2+A3+A4+A5+A6+A7)

A1- Correct Information value

The total of all the amount paid for the purchase of the immovable property has to be mentioned here. The purchase amount and all the expenses like stamp duty etc. In the case of co-ownership, the taxpayer should mention his/her share of investment and give details like name, PAN and share of other co-owners under the remarks section.

A-2 Out of earlier income or savings

If any part of the investment or expenditure is made out of earlier income or savings then it should be mentioned with the amount under this category. Suitable remarks are also required under the remarks section.

A3- Out of receipts exempt from tax

Available exemptions are listed below in the drop-down list. After choosing the relevant exemption the value of the receipt will be determined.

  • Interest income u/s 10.
  • Dividend income u/s 10(34)
  • Long-term capital gains on shares u/s 10(38).
  • Agricultural income u/s 10(1).
  • Share in the total income of firm/AOP etc. u/s 10(2A)
  • Income is not taxable in India.
  • Others

If this field is selected you will be displayed the following rows:

A4- Received from identifiable persons (with PAN)

If any amount is received from an identifiable person who holds a valid PAN, then his/her details are to be mentioned as per the following table:

The Transaction Type consists of:

  • Sales
  • Loan Received
  • Loan Repayment
  • Gift Received
  • Donation Received
  • Other Receipt.

The Transaction Mode consists of two options i.e ‘Cash’ and ‘Non-cash’. More rows can be added by clicking on the button ‘Add Row’. Suitable remarks are to be provided under the remarks section.

A5- Received from identifiable persons (without PAN)

If any amount is received from an identifiable person who doesn’t hold a PAN, then his/her details are to be mentioned as per the following table:

A6- Received from un-identifiable person

If any amount is received from an unidentifiable person, then his/her details are to be mentioned as per the following table:

A7- Others

If any amount which was not covered in any of the above-mentioned categories then it should be mentioned here. Suitable remarks are to be provided under the remarks section.

A8- Unexplained amount

This section computes a figure (A1 – (A2+A3+A4+A5+A6+A7)), for which no explanation is provided.

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FAQs

Is it necessary to login to Compliance Portal? What happens if I don’t log in?

Yes, it is advisable to log in to the compliance portal. If a taxpayer doesn’t log in he/she will not be able to respond to the issues raised.

What is an additional query request?

Upon examining the online response submitted by the taxpayer, ITD can raise an additional query request to seek further information/clarification from the taxpayer. The taxpayer needs to respond to the additional query request as well.

How will the taxpayer come to know about pending e-verification?

If there are any e-Verification issues it will be pushed to the compliance portal for e-verification, Email and SMS will be sent to the taxpayer informing about the issue raised. Taxpayers then need to respond to those issues raised.