Taxes on investment

Investment & TaxesAn Overview

Capital Gain Tax

• Capital gains are the profits that an investor realizes when he or she sells the capital asset for a price that is higher than the purchase price. 

• Capital gains taxes are only triggered when an asset is realized, not while it is held by an investor.

• An investor can own shares that appreciate every year, but the investor does not incur a capital gains tax on the shares until they are sold.

Capital Assets

• Assets which are liable for capital gain taxes: Equity shares Bonds Gold Real Estate Paintings and Drawings Jewellery Archaeological Collections Sculptures

Computation

Long term capital gains (India)

A long-term capital gain arises when you hold any asset for a defined period ranging from 1 year to 3 years.

Indexation• Indexation is the art of removing the impact of inflation from

the profits and taxing the balance profits.

• The indexation figure is released by the Govt. every year and based on these indexation figures, the impact of inflation on the profits is removed.

• To reduce the impact of inflation on your investment, indexation benefit is provided in calculating long-term capital gains. Through this benefit you can adjust your capital gains from inflation by applying an appropriate factor from cost inflation index to the original units

Equity or Equity MF

• Equity Mutual Funds are those funds where equity holding is more than 65% of the total portfolio so even balanced funds will be categorized in Equity Funds.

• Long Term Capital gain on Equity Mutual Funds – if you buy & hold an equity Mutual Fund for more than 1 year, there will be No Tax levied.

• E.g: If you invest Rs1 lakh in XYZ Fund & after 1 year, its value is Rs1.3 Lakh – there will be zero tax on capital appreciation of Rs30000. This is a very big advantage of equity mutual funds.

Debt or Debt MF

A debt fund is one which invest in short-term or long-term bonds, securitized products, money market instruments or floating rate debt..

Tax on Long Term Capital gain on Debt Mutual Funds – here taxation depends on whether investor would like to use indexation or not.

Example• Suppose, Bonds worth Rs 35,00,000 were

purchased in April 2007 • Selling price on April 2011 = Rs 50,00,000• Long term capital gain: 50lakh- 35lakh= 15lakh• Tax = 10% of 15 lakh = 1.5 lakh• Education Cess = 3% of 1.5 lakh= Rs.4500

• Total tax payable= 1,54,500

Indexation benefits calculation• Suppose, Bonds worth Rs 35,00,000 were purchased in April

2007 • Selling price on April 2011 = Rs 50,00,000• Inflation Index:

» 2007-2008 = 551» 2011-2012 = 785

• Indexed Purchase Cost- 35,00,000 x 785/551= Rs 49,86,388• Long Term Capital Gains= 50,00,000-49,86,388 = Rs 13612*• Tax on LTCG= 13612 x 20%= Rs 2722• Education Cess= 2722 x 3% = Rs 82• Total Tax on LTCG = Rs 2804

• Thus, the indexation benefit reduces the tax liability substantially which otherwise would have been a huge payout for any investor.

Short term capital gain (India)

Investment in any asset class, if held for a very short period, is taxed as short-term capital gains

Equity ExampleThis is how short-term capital gains are calculated:

• Cost of Equity units bought in 2011 - Rs 100,000• Price of same units sold after 6 months - Rs

120,000• Short Term Capital Gains - Rs 20,000• Tax Applicable - 20,000 x 15%= Rs 3000• Education Cess - 3000 x 3%=Rs 90• Total Tax payable = Rs 3090

Debt Example

• Bonds worth Rs. 10 lakh were purchased and sold at Rs.12lakh in the same year.

• Short term capital gain is Rs. 2lakh• Investors income form other sources is Rs.1 lakh• Total income for the year= 3 lakh• Tax up to 2lakh is nil.• And on rest 10% as per income tax slab.

Mutual Fund Dividend Taxation

Again this taxation will depend on which type of Mutual Fund you are investing in – Equity or Debt

There is no dividend distribution tax on equity mutual funds & also the dividend received by investors is tax free. So, again a bonus for equity mutual fund investors.

Even in case of Debt Mutual Funds – dividends received by investor are tax free in their hand or they don’t need to show it as a taxable income. But there is dividend distribution tax paid by mutual funds to income tax department

Dividend Distribution Tax on Debt Mutual Funds

This taxation further depends on type of Debt Funds:

Dividend Distribution Tax on Liquid/Money Market Schemes - Liquid/Money Market Schemes means Debt oriented funds which invest in money market instruments or in securities that have maturity of less than 90 days. Here 27.038 %tax (25% Tax + 5% Surcharge + 3%Cess) will be deducted from the dividends.

Dividend Distribution Tax on Debt Funds other than Liquid/Money Market Schemes – Here 13.519 % tax (12.5% Tax + 5% Surcharge + 3%Cess) will be deducted from the dividends.

Securities Transaction Tax

Securities Transaction Tax• All persons do not declare capital gains. Hence

government charges STT which is unavoidable.• It is payable on value of all securities transacted

through a recognized stock exchange.• It is to be paid by the seller of a futures contract on

the date of delivery on the value of the contact.• An option seller pays STT on the premium and if the

option is exercised then the buyer has to pay STT on the option value i.e. ST*No. of options.

• STT on cash segment is more than F&O segment.

Examples• Suppose you buy 100 shares of SBI @ Rs. 1700 per

share.• Then you will have to pay 0.1% on this transaction

as STT and brokerage @ 0.5%.• Now suppose that you sell this share @ Rs. 1800

per share after 2 months.• Then you will have to pay 0.1% on this transaction

as STT and brokerage @ 0.5%.• Since the period under which capital gains to be

computed is less than a year, you will have to pay short term capital gains tax @15% and 3% education cess..

Examples• Suppose you buy 100 shares of Financial

Technologies @ Rs. 400 per share.• Then you will have to pay brokerage @ 0.1%.• Now suppose that you sell this share @ Rs. 500 per

share intraday.• Then you will have to pay 0.025% on this

transaction as STT and brokerage @ 0.1%.• Since the income from intraday transactions is

treated as speculative income, you will have to add this to your total income and pay the maximum tax as per your tax slabs.

Examples• Suppose you go long on a futures contract then you

don’t have to pay STT.• If you go short on a futures contract then you have

to pay STT @ 0.01%.• In case of options if you buy a call/put option and it

is exercised on or before the expiration date then you have to have to pay STT @ 0.125% of the settlement price i.e. ST*no. of options.

• If you sell call/put option then you have to pay STT @ 0.017% on the premium.

• In case of MF you have to pay STT @0.001% on the redemption i.e. NAV*no. of units

Corporate Tax• It is paid on the income by a company operating in

India.• For domestic companies having income less than

INR 10 million, it is 30%+Education Cess.• For domestic companies having income more than

INR 10 million, it is 30%+Surcharge+Education Cess.

• For foreign companies having income less than INR 10 million, it is 40%+Education Cess.

• For foreign companies having income more than INR 10 million, it is 40%+Surcharge+Education Cess.

In case of Capital loss

• In case a loss arises on the sale of an asset

Then the capital loss can be set-off against other capital Gains in that year.

• If the loss cannot be set-off against capital gain in that year then it can be carried forward for the next 8 years and

set-off in the future years if the return was filled before the due date.

Setting off conditions

Wealth tax

• It is basically the difference between the total worth of the taxable assets and the aggregate debts that have been incurred on those assets.

• This calculation does not take into account the exempted assets and is always done on the basis of a valuation date.

Wealth Tax Assets• The following are regarded as assets that can be subjected to

wealth taxes as per Section 2(a) of Wealth Tax Act:

• Commercial buildings and the nearby land• Jewellery, furniture, bullion, utensils, and other articles that are

either totally or partly made of gold, platinum, silver or any other metal or an alloy of these metals. Ones owned as stock-in-trade will be exempted from this tax

• Residential buildings and the nearby land• Guest houses and the nearby land• Urban land – (a) an area that is located within a local authority’s

jurisdiction and has at least 10,000 people as per the last census completed before the valuation date. (b) an area within 8 kms of a local authority like the Central Government

• A farm house located within 25 kms of the local limits of a Cantonment Board and municipality

Computation of Wealth Tax

• Wealth tax is normally levied on the basis of the net wealth of the assessee, which could be an individual, a company or a Hindu Undivided Family.

• At present the rate is 1 percent of the amount that is in excess of INR 15 lakhs. The calculation is done on the basis of a valuation date, which is normally March 31 of the immediately previous assessment year.

Example• Suppose Mr. Chintamani has the following assets :

• Gold Jewellery : INR 6,500,000• Residential building : INR 20,000,000• Commercial building: INR 35,000,000• Farm house: INR 40,000,000

• Total Wealth Asset: INR 101,500,000• Taxable amount: INR 100,000,000

• Wealth Tax = 1% of INR 100,000,000 = INR 1,000,000

US tax slabs

Income tax slabs in China

Long Term capital gainCapital asset India USA China

Equity 0% 0%, 15%, 20% 20%

Debt 20% with indexation

0%, 15%, 20% 20%

Collectables 20% with indexation

28% 20%

Dividend 0% 30% 10%

Real estate 20% 5% or 15% depending upon the income level

20%

Short Term Capital gains

Capital asset India USA China

Equity 15% Ordinary tax rates 20%

Debt Added to income Ordinary tax rates 20%

Collectables Added to income Ordinary tax rates 20%