Saving Tax on income from investment in Share market
09.10.2023
The TAX Talk
By
CA. Naresh Jakhotia
Saving Tax on income from investment in Share market
Query 1]
I am a Senior citizen & investor in Shares & Securities for over 35 years. My questions are as under:
- If the shares/debentures are sold out and sale proceeds out of sale and long term gain is invested in purchasing new immoveable house property (or open plot for construction of house), whether such long term capital gain will attract income tax?
- If exemption is available, please let me know the section under which this clause is admitted by income tax authorities, so as to get exemption from such long term capital gain? [n******rover12@yahoo.com]
Opinion:
Sensex is at an all time high and all the old investors are likely to make handsome profit on sale of the old holding. Lot of taxpayers may be planning to book some profit and may be looking for an option to save Tax. Though the Long Term Capital Gain (LTCG) on sale of shares through the stock exchange is only 10%, there are still options to save this tax as well. Taxpayers in such cases may explore the tax saving option under section 54F. Let us know more about it.
Tax saving option under section 54F:
Section 54F offers exemption from tax if the capital gain arises from transfer of any long term capital assets other than residential house property. Gain arising from sale of shares, gold, etc can be saved under section 54F. To claim an exemption u/s 54F, taxpayers have to invest net sale consideration towards purchase/construction of another house property within a prescribed time frame as under:
a] For purchase of house property:
One year before or two years after the date of sale.
b] For Constructions of house property:
Three years from the date of sale.
There are two important conditions which are important while planning to claim an exemption u/s 54F as under:
a) Taxpayers should not own more than one house property, other than the new asset, on the date of earning LTCG.
b) Taxpayers should not purchase any residential house, other than the new asset, within a period of two years after the date of transfer of original asset or construct any other residential house, other than the new asset, within a period of three years after the date of transfer of the original asset.
Query 2]
I am holding some junk shares, bought between 1994 to 2000. Buy value was too high & now they are delisted on exchange. This year in the FY 2023 -24, in some other shares, I am having long term profit. I would like to book a loss on these junk shares against the profit of some shares. Please suggest how it can be done? Shares are not traded on exchanges. If I transfer shares in someone else demat account at some nominal value of say @ Rs 1/-, Can I do the same, or else what is other way out?[viralkotharingp@rediffmail.com] Opinion:
- As per the income tax laws, one can earn capital gain income or can incur capital loss only when the capital asset is “Transferred”. Just because the shares got delisted or not tradable on the stock exchanges and their value has become zero from the angel of investor does not mean that the taxpayers can claim loss in respect of such shares. Unless and until there is a “Transfer” of shares, profit or loss cannot arise in the hands of the investor. “Transfer” is the primary condition for recognizing any income/loss under the head “Capital Gain”.
- All cases where shares got delisted and don’t have any saleable value or lack tradability can be sold through off market transactions to anyone (at Rs. 1 as mentioned by you in the query) to claim the benefit of loss/diminution in the value of the investment.
However, the above mechanism is subject to a reservation. Section 50CA of the Income Tax Act provides that where the consideration received or accruing as a result of the transfer of unquoted share is less than its fair market value (FMV) then the capital gain income is required to be computed by taking the FMV. The mode of calculation of FMV is prescribed by the CBDT and the same may not be easily accessible to the taxpayers in majority of cases of delisting. Similar transaction is subject to tax in the hands of the buyer as well [U/s 56(2)(x)] if the shares are purchased below its FMV. To this extent, the transaction of transferring the shares at nominal price as suggested above would be subject to tax litigation & disputes. It would be better if CBDT provides specific immunity from Section 50CA [under Rule 11 UAD] for such categories of companies wherein the FMV may not be easily accessible / available to the general investor.
Query 3]
I am having loss in FNO business during the FY 2022-23 of Rs. 50,000/- & turnover less than Rs. 2 Cr. I have sold some shares wherein I made short term profit of Rs. 60,000/-. I have other income of Rs. 2,00,000/- from dividend, interest, etc. As loss from FNO business was set off against other income but as TDS was deducted, to claim refund, I filed I.T. return. Here, if I would have shown loss in FNO than tax audit would have been compulsory. Hence, I showed 6 % of turnover as income and all other income as actual is declared. Please guide whether this is correct? [Devangi –**********ringp@rediffmail.com]
Opinion:
Despite actual loss in Future & Option (FNO), you have shown 6% of the turnover as income while filing ITR. This is perfectly fine as an audit would have been compulsory if you wished to show the loss and claim the benefit of setoff of such loss against your other income. Once you have filed the return with 6% of the turnover as income, the need for maintenance of books of accounts as well as audit is over.
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