Many people have an idea that the income received from shares is exempt from income tax. But in reality it is not so. One should know the tax implications of income from shares before investing in them.
There is no direct tax implication at the time of investing in shares. There are tax benefits in case of investing in the shares of certain approved companies. The tax implication arises only during the sale of shares.
Types of income arising from shares:
An investment made by an individual in shares of a Company may result in the following kinds of incomes:
1. Income from any dividend received from such shares;
2. Income as Capital Gains through transfer of such shares.
Capital gains on sale of shares and its tax rates:
Any profit earned through sale of shares by any individual is “Capital gain” and is taxable according to the provisions of Section 45 of the Income Tax Act, 1961 under the head “Income from Capital Gains”.
The profits received from sale of any capital asset are referred to as long-term if they are held for 36 months or more. But in case of shares of a Company, the requirement relating to holding period is 12 months or more to make the profits long-term.
It should be noted that the requirement of holding period is applicable for the shares of any Company irrespective of the fact whether the Company is Indian or is a foreign one. Even the shares of a private limited company if the gains are held for 12 months or more will be treated as long- term.
According to the current provisions of the laws relating to income tax in India, the long-term capital gains arising from the sale of equity shares listed on Indian stock exchange which are sold through a stock-broker are totally exempt from income tax.
This exemption cannot be availed if the shares belong to any buyback offer or in case the shares are sold on any stock exchange located outside the territory of India.
For availing this exemption, the equity shares should be sold on the stock exchange in India where Security Transaction Tax has been paid. The bill issued by a share broker can help one to verify the fact.
Rate of taxes:
In case of profit received from sale of equity shares sold on stock exchanges in India is held for a period of less than 12 months are taxed at the rate of 15%. In cases where the tax rate is 10%, one has to pay tax of 15 % on such short-term capital gains. The rate of tax will be 15% even in case the rate applicable is 30%.
If an individual’s other income excluding these short-term capital gains is less than the basic exemption limit of income tax, he can avail the benefit of such shortfall at the time of computation of his tax liability.
Tax implications of Dividends:
A dividend received on shares held in an Indian company is totally exempt from income tax. However, the company has to pay a tax known as “Dividend Distribution Tax” on such dividend at the rate of 15 % which means 15 % tax has been paid by the company on your behalf on the dividends you receive.
Section 10 (34) of Income Tax Act, 1961 gives complete exemption to income received from dividend only from an Indian company. However, any income received as dividend from a foreign company is liable to be taxed in the country.
Dividend received from a foreign Company is taxed under the head “Income from other sources” as per the Indian Income Tax Act, 1961.