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How to compute tax on sale of unlisted share/securities?
The tax treatment for gains on the sale of unlisted shares depends primarily on the holding period: Short-Term Capital Gains (STCG):If the unlisted shares are held for less than 12 months, the gains are classified as short-term. Long-Term Capital Gains (LTCG):If the shares are held for 12 months orRead more
The tax treatment for gains on the sale of unlisted shares depends primarily on the holding period:
Short-Term Capital Gains (STCG):
If the unlisted shares are held for less than 12 months, the gains are classified as short-term.
Long-Term Capital Gains (LTCG):
If the shares are held for 12 months or more, they qualify as long-term capital assets.
Chargin sections
Section 47 and Section 48 (Income Tax Act, 1961)
Section 47: Defines how gains arising from a transfer of a capital asset are computed.
Section 48: States that the capital gain is the difference between the full value of consideration and the (indexed) cost of acquisition, cost of improvement, and expenses incurred on transfer.
Section 55(2)
This section prescribes the method for computing the Cost Inflation Index (CII), which is used to adjust the cost of acquisition of long-term assets, thereby reducing the taxable gain.
Computation of Capital Gains
A. Short-Term Capital Gains (STCG) on Unlisted Shares
Method:
Since no indexation benefit is available, the capital gain is computed as:
STCG=Sale Consideration−(Cost of Acquisition+Expense on Transfer+Cost of Improvement)
Tax Rate:
The resulting gain is added to your total income and taxed at the applicable slab rates (if the taxpayer is an individual) or at the normal corporate tax rates (if a company).
B. Long-Term Capital Gains (LTCG) on Unlisted Shares
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- LTCG=Sale Consideration−(Indexed Cost of Acquisition+Cost of Improvement+Expense on Transfer)
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See lessMethod:
For unlisted shares held for 12 months or more, the cost of acquisition (plus cost of improvement and transfer expenses) must be indexed using the Cost Inflation Index from Section 55(2). The computation is:
Indexed Cost of Acquisition=Cost of Acquisition×CII in the year of saleCII in the year of acquisition/CII in the year of acquisition. The LTCG is then calculated as:
Tax Rate:
The taxable LTCG is taxed at a flat rate of 20% (plus applicable surcharge and cess) as per the current provisions for long-term capital gains on unlisted shares.
How to compute Short term capital gain on sale of equity shares or mutual fund units?
Steps to Compute the Short-Term Capital Gain (STCG) Step 1: Determine the Full Value of Consideration This is the total sale price received on the transfer of the equity shares or mutual fund units. Step 2: Deduct the Cost of Acquisition Subtract the original cost at which the shares or units were pRead more
Steps to Compute the Short-Term Capital Gain (STCG)
Step 1: Determine the Full Value of Consideration
This is the total sale price received on the transfer of the equity shares or mutual fund units.
Step 2: Deduct the Cost of Acquisition
Subtract the original cost at which the shares or units were purchased.
Note: Since the holding period is less than 12 months, no indexation is allowed.
Formula: Cost of Acquisition = Purchase Price (as is)
Step 3: Deduct Any Directly Attributable Expenses
This includes expenses such as brokerage fees, transaction charges, and any other expenses incurred in connection with the sale.
These expenses are deducted from the sale value.
Step 4: Compute the Net Short-Term Capital Gain
Formula:
STCG = (Full Value of Consideration) – (Cost of Acquisition + Directly Attributable Expenses)
Step 5: Taxation of STCG
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See lessThe net gain computed in Step 4 is then taxed at the flat rate of 15% under Section 111A.
After computing the tax at 15%, add applicable surcharge and cess to arrive at the total tax liability.
Whats are the same hints for tax shavings on capital gain?
Key Sections Providing Exemptions & Benefits A. Section 54 What it covers:Exemption for long-term capital gains arising from the sale of a residential house property, when the gains are reinvested in purchasing or constructing another residential property. Key Conditions: The new residential proRead more
Key Sections Providing Exemptions & Benefits
A. Section 54
What it covers:
Exemption for long-term capital gains arising from the sale of a residential house property, when the gains are reinvested in purchasing or constructing another residential property.
Key Conditions:
The new residential property must be purchased either one year before or two years after the sale (or constructed within three years from the date of sale).
The exemption applies to the extent of the capital gains invested.
B. Section 54EC
What it covers:
Exemption for long-term capital gains (arising from the sale of any asset) if the gains are invested in specified bonds (such as those issued by NHAI or REC) within six months of the asset transfer.
Key Conditions:
Investment limit is capped at ₹50 lakh per financial year.
The bonds have a specified lock-in period (generally three years).
C. Section 54F
What it covers:
Exemption on long-term capital gains derived from the sale of any asset (other than a residential house property) if the net sale consideration is invested in purchasing a residential house property.
Key Conditions:
The entire net sale consideration (not just the gain) must be invested.
The exemption is proportionate: if only a part of the sale consideration is invested, the exemption is limited accordingly.
D. Section 55(2)
Indexation Benefit:
For assets held as long-term capital assets, the Act permits the adjustment of the cost of acquisition using the Cost Inflation Index (CII), thereby reducing the taxable capital gain.
Additional Strategic Hints for Tax Savings
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See lessHold Long-Term:
Assets held for the long term (as defined under the Act) not only qualify for lower tax rates compared to short-term gains but also benefit from indexation (Section 55(2)).
Tip: Refrain from selling assets before the long-term holding period to take advantage of this benefit.
Plan Sale Transactions:
Consider spreading the sale of assets over multiple financial years. This can help manage the overall taxable income and take advantage of lower tax slabs, especially for individual taxpayers.
Documentation & Timely Reinvestment:
Ensure that reinvestments (as required under Sections 54, 54EC, or 54F) are executed within the prescribed time frames. Maintain all relevant documentation—such as purchase agreements, receipts, and bank statements—to support the claim for exemption during assessment.
Review Investment Limits:
For Section 54EC, be aware of the ₹50 lakh investment ceiling. If your capital gains exceed this amount, plan other strategies for the remaining gains.
Utilize Tax Planning Tools:
Use financial planning tools or consult professionals to estimate the tax impact of a sale and the extent of exemptions available. This preemptive planning helps in optimizing investment decisions.
What are covered in Dividend under income tax act?
As per Section 2(22) of the Income Tax Act, 1961, dividend includes both actual and deemed dividends. This refers to any distribution by a company out of its accumulated profits (whether capitalized or not), whether in cash or otherwise, to its shareholders. Example: Final dividend, interim dividendRead more
As per Section 2(22) of the Income Tax Act, 1961, dividend includes both actual and deemed dividends.
This refers to any distribution by a company out of its accumulated profits (whether capitalized or not), whether in cash or otherwise, to its shareholders.
Example: Final dividend, interim dividend declared by a company to its equity shareholders.
Deemed Dividend [Clauses (b) to (e) of Section 2(22)]
Even if not expressly called “dividend”, the following distributions are deemed to be dividend and are taxable under the Income Tax Act:
🔹 (b) Distribution of debentures or deposit certificates to shareholders:
🔹 Tax Treatment: Treated as dividend income.
🔹 (c) Distribution on liquidation:
🔹 Important: Capital returned in excess of accumulated profits is not treated as dividend.
🔹 (d) Distribution on reduction of capital:
🔹 (e) Loans and advances to shareholders (Deemed Dividend):
This is one of the most litigated and important clauses.
🛑 Exception: It does not apply to a company in which the public is substantially interested (i.e., a listed company).
📝 Clarification – What is NOT a Dividend (Section 2(22), Provisos):
Any distribution out of share premium account (Section 52 of Companies Act) – not considered dividend.
Buy-back of shares u/s 77A of Companies Act, 1956 – not treated as dividend, but subject to capital gains tax.
Distribution made on preference shares, unless covered under clause (a) to (e) – not deemed dividend.
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Is dividend taxable under Income Tax Act?
Yes, dividend is taxable under the Income Tax Act, 1961. Here's a detailed, expert-level reply tailored to your rules: Dividend income is now taxable in the hands of the recipient/shareholder as per Section 56(2)(i), under the head "Income from Other Sources". Taxability of Dividend Income (From AYRead more
Yes, dividend is taxable under the Income Tax Act, 1961. Here’s a detailed, expert-level reply tailored to your rules:
Dividend income is now taxable in the hands of the recipient/shareholder as per Section 56(2)(i), under the head “Income from Other Sources”.
Taxability of Dividend Income (From AY 2021-22 onwards):
TDS on Dividend – Section 194 & 195:
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See lessSection 194:
TDS @ 10% if the dividend paid to resident exceeds ₹5,000 in a financial year.
Section 195:
TDS on dividend paid to non-resident is generally 20% (plus surcharge and cess), subject to benefits of DTAA.
How to compute tax on lotteries and wining from games?
Section 115BB of the Income Tax Act, 1961 – Tax on winnings from lotteries, crossword puzzles, card games, and other games of any sort or gambling or betting: "Where the total income of an assessee includes any income by way of winnings from lotteries, crossword puzzles, races including horse races,Read more
Section 115BB of the Income Tax Act, 1961 – Tax on winnings from lotteries, crossword puzzles, card games, and other games of any sort or gambling or betting:
Rate of Tax:
Flat 30% on the gross winnings (without any basic exemption limit).
Surcharge and cess (currently 4%) are added to the 30% tax.
No deduction of expenses or allowances is permitted against such income.
No benefit of slab rates or chapter VI-A deductions (like 80C, 80D, etc.) on this income.
TDS Deduction – Section 194B:
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See lessFor cash winnings, TDS is deducted directly.
For non-cash winnings (like car, bike, etc.), the winner must pay tax equivalent to the fair market value of the prize before claiming it, or the provider pays it on their behalf (grossing up required).
How to compute tax on rent received from renting of plant and machinery?
Rent received from letting of plant and machinery is taxable under the head "Income from Other Sources" if it is not part of the assessee’s regular business operations. Refer Section 56(2)(ii) of the Income Tax Act, 1961: “Income of every kind which is not to be excluded from the total income underRead more
Rent received from letting of plant and machinery is taxable under the head “Income from Other Sources” if it is not part of the assessee’s regular business operations.
Refer Section 56(2)(ii) of the Income Tax Act, 1961:
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