Chapter 11: Taxation of Equity Products

Table of Contents

Sources of Income
Types of income: Capital gains and dividend income
Capital gains: Profit earned when a capital asset is sold at a price higher than its cost of acquisition
Dividend income: Profit distributed by a company to its shareholders
Taxability of income: discussed in detail in the following paragraphs
Dividend Income
Dividend: Distribution of profits by a company to its shareholders
Date of receipt: Not material in the case of final dividend
Interim dividend: Chargeable to tax on receipt basis
Tax treatment: Depends on whether the dividend is received from a foreign or domestic company
Place of accrual: Dividend payable by an Indian company is deemed to accrue or arise in India
Tax on dividend: After the abolition of Dividend Distribution Tax, dividend income is taxable in the hands of shareholders or unit-holders
Capital Gains
Profit arising from the sale of a ‘capital asset’ is chargeable to tax as a capital gain
Income from capital gains is computed by deducting the full value of consideration from expenses incurred and cost of acquisition/improvement
Exemption under Sections 54 to 54GB to the extent of the net result of above calculation
Long-term capital gains: Taxable at concessional rates of 20% or 10%
Short-term capital gains: Generally added to total taxable income and are chargeable to tax as per the applicable tax rate
Topic: Tax on Inter-corporate Dividend
– Dividend from companies taxed to shareholders
– Section 80M introduced to remove cascading effect
– Inter-corporate dividend reduced from total income
– Dividend income from foreign company taxed at 15%
– Tax computed on gross amount of dividend
Topic: Period of Holding for Listed Equity Shares
– Gains treated as long-term/short-term capital assets
– Short-term: held for not more than 12 months
– Securities sold through broker date considered
– Securities sold directly, contract date considered
– Securities held in demat form determined by FIFO
Topic: Securities held in Demat Form
– FIFO method for determining period of holding
– Securities first in demat account first to be sold
– Contract note/Broker’s note considered for period
– Multiple accounts, FIFO method applied account-wise
– Old physical stock dematerialized, FIFO based on date

Tax on Long-Term Capital Gains as per Section 112A

Taxability Rate of Tax Applicability
Exemption Limit Nil When the aggregate long-term capital gains during the year are less than or equal to INR 1,00,000.
Concessional Rate 10% + applicable surcharge and cess When the aggregate long-term capital gains during the year exceed INR 1,00,000.
Conditions for Concessional Rate Securities Transaction Tax (STT) must be paid at the time of acquisition and transfer of equity shares, except in certain specified cases. If STT is not paid, the concessional rate of tax is not available. However, the CBDT has relaxed this condition in certain cases.
Cost of Acquisition Higher of Actual Cost or Lower of Fair Market Value (FMV) as on 31-01-2018 or Full Value of Consideration Applicable for equity shares acquired on or before 31-01-2018.
Cost of Acquisition – Bonus Shares Computed in the same way as equity shares, if the conditions prescribed in Section 112A are met. Applicable for bonus shares.
Cost of Acquisition – Equity Shares Actual cost for which it is acquired by the assessee. Applicable for equity shares acquired on or after 01-02-2018.
Cost of Acquisition – Shares Acquired before Listing FMV of shares = Cost of acquisition x CII of 2017-18 (i.e., 272) / CII for the year in which shares were first held by the assessee (or previous owner) or 2001-02, whichever is later. Applicable for equity shares listed on a recognized stock exchange at the time of transfer but not listed at the time of acquisition.

Tax on Long Term and Short Term as per sections 112 & 111A

Topic Tax on long-term capital gain Tax on short-term capital gain
Rate 20% (10% with indexation) 15% (concessional rate)
Applicable to Equity shares Listed equity shares
Benefit of indexation Available Not available
FPIs 10% (without indexation) Not applicable
Deduction allowed Not allowed Not allowed
Additional taxes Surcharge and health & education cess Securities transaction tax (if applicable) or transaction in foreign currency on recognized stock exchange located in an International Financial Services Centre.

Taxes on Unlisted Shares-

Topic Notes
Tax Treatment of Unlisted Equity Shares – Tax treatment depends on whether gains are long-term or short-term.
– Unlisted shares held for less than 24 months are treated as short-term capital assets.
– Unlisted shares held for more than 24 months result in long-term capital gains.
– Sale consideration is determined as per section 50CA if less than fair market value.
Tax on dividend from unlisted shares Taxability is the same as in case of listed equity shares.
Tax on long-term capital gains from unlisted shares Taxable at 20% plus surcharge and health & education cess. Indexation benefit available to resident taxpayers, but not to non-residents.
– Tax treatment is same even if shares are sold over the counter.
Tax on short-term capital gains from unlisted shares Taxable at normal slab rate.
– FPIs are taxed at a flat rate of 30%.
– No deduction under Chapter VI-A allowed.
Tax treatment of Capital Gains when unlisted shares sold after listing on recognised stock exchange Shares allotted through Initial Public Offer (IPO) may not have paid STT.
– Shares sold on the stock exchange are subjected to STT.
– Transactions are governed by section 112A and taxed at 10% plus surcharge and cess.

Tax Treatment of Preference Shares

Aspect Tax Treatment
Definition Shares with priority rights over ordinary dividends
Preference share capital Part of issued share capital with preferential rights
Tax on dividend Same as equity shares
Tax on long-term capital gain Listed shares held > 12 months: 10% without indexation or 20% with; unlisted shares held > 24 months: 10% without indexation or 20% with
Tax on short-term capital gain Listed shares sold/redeemed < 12 months: normal rate; unlisted shares sold/redeemed < 24 months: normal rate; FPIs: flat rate of 30%
Conversion to equity shares Not regarded as transfer; cost of acquisition and holding period of preference shares added to equity shares
Example Mr. X: Listed preference shares sold after > 12 months
  Option 1: 20% tax rate with indexation
  Option 2: 10% tax rate without indexation
  Tax saving: Rs. 75

Tax Treatment for GDR/ADR

Tax Treatment GDR ADR
Definition Depository receipts or certificates issued by overseas depository banks against the issue of ordinary shares or FCCBs of Indian issuing company US dollar-denominated stock that represents equity ownership in a non-US company
Markets Euro market and US market US market
Listing London Stock Exchange, New York Stock Exchange, American Stock Exchange, NASDAQ, Luxemburg Stock Exchange etc. US stock exchanges
Dividend income Concessional rate of 10% under section 115AC of the Income-tax Act. Concessional rate of 10% under section 115AC of the Income-tax Act.
Long-term capital gain Exempt from tax under section 47 for transfer between two non-resident persons. Capital gain arising from transfer by a non-resident liable to tax at 10% if gains are long-term. 20% tax rate for others. Exempt from tax under section 47 for transfer between two non-resident persons. Capital gain arising from transfer by a non-resident liable to tax at 10% if gains are long-term. 20% tax rate for others.
Short-term capital gain Taxable at normal rates. FPIs taxed at 30%. Taxable at normal rates.
Capital gain on conversion Capital gain is computed by reducing the cost of acquisition/indexed cost of acquisition of GDRs from the value of shares. Capital gain is computed by reducing the cost of acquisition/indexed cost of acquisition of ADRs from the value of shares.

Tax Treatment of Shares Warrants

Transaction Tax Treatment
Conversion of warrants Short-term capital gains taxed at applicable rates
into shares Full value of consideration = fair market value on conversion
  FPIs taxed at 30% + surcharge and health & education cess
Transfer of warrants Short-term capital gains taxed at applicable rates
to another person Full value of consideration = sum received from buyer
  FPIs taxed at 30% + surcharge and health & education cess
Forfeiture of premium paid No tax treatment, loss ignored for calculation of taxable income

Notes:

  • Share warrants are options issued by companies that give the warrant holder the right to subscribe to equity shares at a predetermined price and time period.
  • The strike price is the price at which the warrant becomes exercisable, and the warrant holder must pay at least 25% of it upfront.
  • The tenure of share warrants cannot exceed 18 months from the date of their allotment.
  • If the warrant holder does not exercise the option to take equity shares within 3 months from the payment of full consideration, the consideration made for the warrants shall be forfeited.
  • Transactions possible with share warrants include conversion into shares, transfer to another person, and forfeiture.
  • The conversion of share warrants into shares is treated as a transfer of share warrants and is subject to short-term capital gains tax.
  • The resultant capital gains arising from conversion will always be deemed as short-term capital gains and taxed at applicable rates.
  • The full value of consideration is the fair market value of shares on the date of conversion of warrants into shares.
  • The transfer of share warrants to another person is subject to short-term capital gains tax.
  • The resultant capital gains arising from transfer will always be deemed as short-term capital gains and taxed at applicable rates.
  • The full value of consideration is the sum received from the buyer of the warrant.
  • If the warrant holder is an FPI, the tax rate is 30% plus surcharge and health & education cess under Section 115AD.
  • Loss arising from the forfeiture of the premium paid for share warrants has no tax treatment and is ignored for the calculation of taxable income.

Tax Treatment of Mutual Funds

Topic Description
Mutual Funds Funds that collect money from investors and invest the same in the capital market for their benefit. Managed by Asset Management Company through fund managers. Registered with SEBI.
Equity Oriented Funds Mutual funds that invest more than 65% of their corpus in equity and equity-related securities.
Fund of Funds (FoF) Mutual fund scheme that invests in other schemes of mutual funds. Minimum 90% of the total proceeds of such fund is invested in the units of another fund.
Equity Linked Saving Scheme (ELSS) Funds Category of mutual funds that encourage long-term equity investments. Tax-deductible investment in equity-based mutual funds. Has a compulsory lock-in period of 3 years.
Systematic Investment Plan (SIP) Mutual fund tool that allows investors to enter the stock market by investing a fixed amount of money in a particular mutual fund at every stipulated time period.
Systematic Withdrawal Plan (SWP) Plan used to redeem the investment from a mutual fund scheme in a phased manner. The opposite of SIP. Pays investors a specific amount of payout at pre-determined time intervals.
Systematic Transfer Plan (STP) Plan that allows the investor to transfer amount from one scheme to another scheme of the same mutual fund house. Transfers a fixed amount of money from one mutual fund to another.

Taxation of Mutual Funds

Topic Description
Capital Gains Profit arising from redemption or sale of units of mutual fund.
Tax on dividend from equity-oriented mutual funds Income distributed by mutual funds to a resident unit-holder is taxable in his/her hands as per applicable tax rates.
Tax on long-term capital gains from equity-oriented mutual funds covered under section 112A Long-term capital gains are taxable at 10% if they exceed Rs. 1 lakh. The period of holding should be more than 1 year. No indexation benefit is available.

Tax Treatment of Derivatives-

Topic Sub-Topic Key Points
Tax Treatment of Derivatives Derivatives are financial products whose value is derived from real assets. Trading in derivatives is popular among stock market investors.
  Futures & Options (F&O) – Future contracts: buying or selling underlying security or index or commodity, at a specified price on a future date.
    – Option contracts: gives the right but not the obligation to buy or sell the underlying asset on or before a specific date at a stated price.
    – Derivative transactions are not treated as speculative if carried out through recognised stock exchanges via registered intermediaries.
Types of Derivative Contracts Futures Contracts – Agreement between parties to buy/sell underlying assets at a fixed price in the future.
  Options Contracts – Two types: Call option (buy asset by a certain date for a certain price) and Put option (sell asset by a certain date for a certain price).
  Forward Contracts – Customised contracts between two parties to settle on a specific date in future at a predetermined price.
  Swaps – Private agreements to exchange cash flows in the future.
    – Interest rate swaps: swapping interest related cash flows.
    – Currency swaps: swapping principal and interest between parties with cash flows in different currencies.
  Currency Derivatives – Exchange-based futures and options contracts that allow hedging against currency movements.
    – Used by corporates with significant exposure to imports/exports.
  Interest Rate Derivatives – Derivative contract with value derived from benchmark interest rates or interest rate indexes.
    – Traded on recognized stock exchanges or over-the-counter (OTC).
  Commodity Derivatives – Contract to buy or sell a commodity at a preset price for delivery on a future date.
    – Commodities Transaction Tax (CTT) introduced in 2013 on non-agricultural commodities.
    – Trading regulated by Securities Contract (Regulation) Act, 1956 (SCRA) and conducted on national and regional commodity exchanges.
Nature of Derivative Income
– Gains or losses from F&O trading are taxable under PGBP
– Speculative and non-speculative income treated differently
– Loss from speculative transaction can only be set-off against
speculative income
– Certain derivative transactions excluded from speculative
– FPIs’ derivative income taxed as capital gain
Computation of Turnover
– Total of favourable and unfavourable
differences considered as turnover
– Premium received on sale of options
included in turnover
– Difference on reverse trades included
in turnover
Scheme of Taxation
– F&O income can be taxed under normal or presumptive scheme
– Presumptive scheme applicable for turnover < Rs. 2 crores
– Profit declared at 6% or 8% of turnover
– No further expenses allowed or disallowed
Set-off and Carry Forward of Losses
– F&O losses can be set-off against income from other heads
– Business loss cannot be set-off against income from salary
– Unabsorbed loss can be carried forward up to 8 assessment years
– Loss can be set-off only against business income
– Return of income must be filed on or before the due date

Dividend Stripping:

  • Dividend stripping is a tax evasion strategy used by investors in securities and mutual fund units to reduce their tax liability.
  • It involves buying securities or units just before the record date for dividend distribution and then selling them at a lower price after receiving the dividend, incurring a short-term capital loss.
  • The investor gets tax-free dividend income and can set off the short-term capital loss against any other capital gain.
  • To curb this practice, Section 94(7) was inserted in the Income-tax Act, which ignores the loss arising from such purchases and sales to the extent that it does not exceed the dividend income received.
  • However, with the Finance Act 2020 abolishing the provisions of dividend distribution tax, any dividend income received after 01-04-2020 is not exempt from tax, making dividend stripping redundant from that date.

Bonus Stripping-

Bonus stripping is a practice where an investor buys mutual fund units just before the record date to receive bonus units and sells the original units at a price lower than the purchase price after the record date, incurring a short-term capital loss. To discourage this practice, the Income-tax Act has Section 94(8), which states that if a person acquires mutual fund units within three months before the record date and is allotted bonus units on that date, any loss arising from the transfer of the original units will be ignored for tax calculation if the person transfers those units within nine months after the record date while holding all or some of the bonus units.

The amount of loss ignored will be deemed to be the cost of acquisition of the bonus units held by the investor on the date of the transfer of the original units. Here’s an example:

Example: Mr. Ravi purchased 1,000 equity-oriented mutual fund units at Rs. 106 per unit on 01-07-2019. On 01-09-2019, the mutual fund declared a 1:1 bonus unit allotment, meaning that for every unit held, Mr. Ravi received one bonus unit. After receiving the bonus units, Mr. Ravi sold the original 1,000 units on 01-04-2020 at Rs. 95 per unit.

Solution: As Mr. Ravi sold the original units within nine months after the record date and continued to hold the bonus units, any loss on the sale of the original units would be ignored for tax calculation. The loss on the sale of the original units is Rs. 11,000, and the cost of acquisition of the 1,000 bonus units is deemed to be Rs. 11,000, so the per-unit cost of the bonus units is Rs. 11.

Benefits not allowed from Capital Gains

Type of Capital Gain Benefits not Allowed
Long-term capital gain chargeable to tax at 20% No deduction under Sections 80C to 80U
Long-term capital gain chargeable to tax at 10% No benefit of indexation, no computation in foreign currency, no deduction under Sections 80C to 80U, no Section 87A rebate
Short-term capital gain chargeable to tax at 15% (section 111A and 115AD) No computation in foreign currency, no deduction under Sections 80C to 80U

Note that the benefits not allowed depend on the type of capital gain and the applicable section of the Income-tax Act. For example, long-term capital gain chargeable to tax at 10% (section 112A) from the transfer of specified listed securities does not allow for the Section 87A rebate.

Adjustment of Exemption Limit from Capital Gains:

  • The exemption limit for a resident individual or HUF is not chargeable to tax up to a maximum limit.
  • If the total income of a resident individual or HUF (excluding long-term capital gains referred to in Section 112 and 112A or short-term capital gains covered under section 111A) is less than the maximum exemption limit, the amount of such capital gains shall be reduced by the amount that would enable the individual or HUF to fully claim the maximum exemption limit.
  • For example, if the total income of a resident individual is Rs. 1,85,000 (excluding long-term capital gains) and the long-term capital gain from the sale of unlisted shares is Rs. 2,50,000, the tax shall be computed on Rs. 1,85,000 after reducing the long-term capital gain by Rs. 65,000.
  • In the case of Mrs. R, a resident and ordinarily resident, who purchased a listed equity share worth Rs. 1,00,000 in June 2019 and sold it in January 2021 for Rs. 2,60,000, her long-term capital gain on listed equity shares is Rs. 1,60,000. As her total income (including interest income of Rs. 25,000) is below the minimum chargeable limit of Rs. 2,50,000, she does not need to pay any long-term capital gains tax.
  • However, if Mrs. R were a non-resident, she would not be eligible for the exemption limit. Therefore, she would need to pay tax on the long-term capital gains exceeding Rs. 1,00,000 at the rate of 10% as per section 112A, plus cess at 4%.

Table:

Resident/Non-resident Eligibility for Exemption Limit Tax on Long-term Capital Gains
Resident Eligible if total income is less than maximum exemption limit Not applicable if total income (including capital gains) is below the minimum chargeable limit; otherwise, tax shall be computed after reducing the long-term capital gain by the amount that would enable the individual or HUF to fully claim the maximum exemption limit.
Non-resident Not eligible Tax on long-term capital gains exceeding Rs. 1,00,000 at the rate of 10% as per section 112A, plus cess at 4%.

Mock Tests-

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Chapter 11: Taxation of Equity Products - 1

1 / 50

1. What is the intention behind introducing Commodities Transaction Tax (CTT)?

2 / 50

2. What is the tax treatment for derivative transactions carried out on recognized stock exchanges?

3 / 50

3. What are swaps?

4 / 50

4. What are interest rate derivatives?

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5. What is the time period for which an investor should hold the securities/units to avoid dividend stripping provisions?

6 / 50

6. Name two national commodity exchanges in India.

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7. What is the tax rate applicable to long-term capital gains from equity-oriented mutual funds if the amount does not exceed Rs. 1,00,000?

8 / 50

8. What is the tax rate applicable to the short-term capital gain in Situation 1?

9 / 50

9. In the context of capital gains, how is the maximum exemption limit adjusted?

10 / 50

10. How is the loss arising from bonus stripping treated for tax purposes?

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11. What is the tax rate on long-term capital gains from equity-oriented mutual funds not covered under section 112A if STT is not paid at the time of transfer?

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12. What is the tax rate on long-term capital gains from GDRs for foreign portfolio investors (FPIs)?

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13. Which benefits are not allowed from short-term capital gains taxed at 15%?

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14. Mrs. R, a resident individual, purchased listed equity shares worth Rs. 1,00,000 and sold them for Rs. 2,60,000. She has interest income of Rs. 25,000. Calculate her tax liability on the sale of shares.

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15. Mr. X, a resident individual, has a total income of Rs. 3,50,000 and long-term capital gains of Rs. 1,50,000. What is his taxable income?

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16. How is the loss arising from dividend stripping treated for tax purposes?

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17. What is the purpose of bonus stripping?

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18. Which benefits are not allowed from long-term capital gains taxed at 20%?

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19. In Situation 4, where the call option is not exercised or transferred and the contract is settled on expiry, what is the nature of the capital asset?

Example 10: X Fund, a foreign portfolio investor (FPI), purchased 1 call option of X Ltat a premium of Rs. 35 per share on 01-06-2020. The details of the call option are as follows:

Lot size per option 1,000 shares
Exercise price Rs. 450 per share
Date of expiry 25-06-2020

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20. How is the cost of acquisition of units of equity-oriented mutual funds acquired on or after 01-02-2018 determined?

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21. What is the time period for which an investor should hold the units to avoid bonus stripping provisions?

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22. For how many months does an individual need to hold listed equity shares to qualify for long-term capital asset?

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23. What is a future contract?

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24. In Situation 4, where the call option is not exercised or transferred and the contract is settled on expiry, what is the tax treatment of the settlement?

X Fund, a foreign portfolio investor (FPI), purchased 1 call option of X Ltat a premium of Rs. 35 per share on 01-06-2020. The details of the call option are as follows:

Lot size per option 1,000 shares
Exercise price Rs. 450 per share
Date of expiry 25-06-2020

Situation 4: It does not transfer or exercise the call option and, therefore, contract was settled by stock exchange on expiry, that is, 25-06-2020 when premium for this option was prevailing at Rs. 10 per share.

25 / 50

25. What is the tax rate on long-term capital gains from unlisted shares for a resident?

26 / 50

26. Is indexation benefit available for equity-oriented mutual funds if securities transaction tax (STT) is not paid?

27 / 50

27. Where can interest rate derivatives contracts be traded?

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28. What is the tax rate on short-term capital gains from equity-oriented mutual funds if STT is paid at the time of sale?

29 / 50

29. What is considered as the fair market value of units of equity-oriented mutual funds if there was no trading on 31-01-2018?

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30. How is the income from trading in shares and derivatives taxed?

31 / 50

31. Which act regulates the trading of derivatives in India?

32 / 50

32. Which benefits are not allowed from long-term capital gains taxed at 10%?

33 / 50

33. What is the tax rate on short-term capital gains from listed equity shares for a non-resident?

34 / 50

34. What is the purpose of dividend stripping?

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35. What is the tax rate on short-term capital gains from equity-oriented mutual funds if STT is not paid at the time of transfer?

36 / 50

36. Which benefit is not allowed from short-term capital gains of Foreign Portfolio Investors (FPIs)?

37 / 50

37. What is a commodity derivative?

38 / 50

38. Are indexation benefits available for listed preference shares?

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39. Can losses from F&O trading be set-off against income from other heads?

40 / 50

40. What are forward contracts?

41 / 50

41. What is the tax rate on long-term capital gains from equity oriented mutual funds for a resident individual?

42 / 50

42. What are currency derivatives?

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43. What is considered as the cost of acquisition for units of equity-oriented mutual funds not listed on a recognized stock exchange?

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44. What happens if the return of income is not filed within the prescribed due date?

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45. In Situation 1, where the call option is exercised and shares are subsequently sold, what is the nature of the capital gain?

X Fund, a foreign portfolio investor (FPI), purchased 1 call option of X Ltat a premium of Rs. 35 per share on 01-06-2020. The details of the call option are as follows:

Lot size per option 1,000 shares
Exercise price Rs. 450 per share
Date of expiry 25-06-2020

Situation 1: It exercised the call option to buy shares of X Lton 15-06-2020 and such shares were subsequently sold for Rs. 550 each on 30-11-2020

46 / 50

46. How long can unabsorbed business loss be carried forward?

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47. What is the tenure for share warrants to qualify as long-term capital assets?

48 / 50

48. What is an option contract?

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49. In Situation 2, where the call option is transferred at a loss, what is the nature of the capital asset?

X Fund, a foreign portfolio investor (FPI), purchased 1 call option of X Ltat a premium of Rs. 35 per share on 01-06-2020. The details of the call option are as follows:

Lot size per option 1,000 shares
Exercise price Rs. 450 per share
Date of expiry 25-06-2020

50 / 50

50. In Situation 3, where the call option is transferred at a gain, what is the tax rate applicable to the short-term capital gain?

X Fund, a foreign portfolio investor (FPI), purchased 1 call option of X Ltat a premium of Rs. 35 per share on 01-06-2020. The details of the call option are as follows:

Lot size per option 1,000 shares
Exercise price Rs. 450 per share
Date of expiry 25-06-2020

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NISM-Series-X-B: Investment Adviser (Level 2) Certification

Chapter 11: Taxation of Equity Products - 2

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1. How are short-term capital gains from the transfer of GDRs taxed for Foreign Portfolio Investors (FPIs)?

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2. Can deductions under Chapter-VI A be claimed against long-term capital gains from GDRs?

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3. How is the cost of acquisition of units of equity-oriented mutual funds acquired on or before 31-01-2018 determined?

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4. Can FPIs claim deductions under Chapter VI-A for warrant income?

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5. How is the conversion of share warrants into shares taxed?

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6. What is a share warrant?

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7. How are capital gains calculated on the transfer of share warrants to another person?

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8. What is the tax treatment of equity-oriented mutual funds?

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9. What are equity-oriented mutual funds?

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10. What is the tax rate applicable to capital gains for an FPI (Foreign Portfolio Investor)?

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11. How are short-term capital gains from the transfer of listed preference shares taxed for Foreign Portfolio Investors (FPIs)?

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12. Are capital gains from the transfer of share warrants considered as long-term or short-term?

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13. 1In Example 5, what is the amount of capital gain chargeable to tax in the hands of Mr. X if he opts for option 1 (with indexation)?

Example 5: Mr. X (resident in Indiacquired 1,000 preference shares of ABC Ltat Rs. 105 each on 01-07-201The shares are listed on a stock exchange. He transferred such shares on 04-05- 2020 at Rs. 120 per share. Compute the amount of capital gain chargeable to tax in hands of Mr. X.

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14. What happens to consideration made in respect of forfeited warrants?

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15. What is SIP in mutual funds?

16 / 50

16. Are capital gains from the conversion of share warrants into shares considered as long-term or short-term?

17 / 50

17. Which of the following expenses can be deducted from the income received as dividends from mutual funds?

18 / 50

18. Are transfers of GDRs between two non-resident persons treated as taxable transfers?

19 / 50

19. Are deductions allowed from dividend income received from GDRs?

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20. What is the tax treatment of dividend income from GDRs purchased by non-resident or foreign companies?

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21. How is the capital gain on conversion of GDRs into shares taxed?

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22. What is the tax rate for long-term capital gains from GDRs?

23 / 50

23. What is the lock-in period for investments in ELSS funds?

24 / 50

24. What is the holding period required for GDRs to be treated as long-term capital assets for non-residents?

25 / 50

25. What is the tax treatment of capital gains from mutual funds?

26 / 50

26. What is the maximum tenure of a share warrant?

27 / 50

27. How is the period of holding of shares acquired on the conversion of GDRs determined?

28 / 50

28. What are American Depository Receipts (ADRs)?

29 / 50

29. How is the cost of acquisition of shares acquired on the conversion of GDRs calculated?

30 / 50

30. What happens if a warrant holder does not exercise the option to take equity shares within the specified period?

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31. How is the transfer of share warrants to another person taxed?

32 / 50

32. Under section 112A, if the amount of long-term capital gains from equity-oriented mutual funds exceeds Rs. 1,00,000, what is the tax rate?

33 / 50

33. What are ELSS funds?

34 / 50

34. What is the tax rate for dividend income from GDRs in India?

35 / 50

35. What is the tax treatment of dividends received from equity-oriented mutual funds by a resident unit-holder?

36 / 50

36. How are short-term capital gains from the transfer of listed preference shares taxed for individuals, HUFs, and companies (excluding FPIs)?

37 / 50

37. What is the tax treatment of long-term capital gains from equity-oriented mutual funds if the transaction is undertaken in an IFSC?

38 / 50

38. 1In Example 5, what is the amount of capital gain chargeable to tax in the hands of Mr. X if he opts for option 2 (without indexation)?

Example 5: Mr. X (resident in Indiacquired 1,000 preference shares of ABC Ltat Rs. 105 each on 01-07-201The shares are listed on a stock exchange. He transferred such shares on 04-05- 2020 at Rs. 120 per share. Compute the amount of capital gain chargeable to tax in hands of Mr. X.

39 / 50

39. How are capital gains calculated on the conversion of share warrants into shares?

40 / 50

40. What is the tax treatment of dividends received from mutual funds?

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41. What is the tax treatment of the premium forfeited by the issuer?

42 / 50

42. How are capital gains from the conversion of share warrants taxed?

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43. What is the tax rate for short-term capital gains from GDRs?

44 / 50

44. What is a Global Depository Receipt (GDR)?

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45. How are capital gains from the transfer of share warrants taxed?

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46. What is STP in mutual funds?

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47. How are long-term capital gains from the transfer of GDRs taxed for non-residents?

48 / 50

48. What is SWP in mutual funds?

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49. What is the tax rate applicable to long-term capital gains from equity-oriented mutual funds covered under section 112A?

50 / 50

50. What is the tax treatment of mutual fund dividends received by Non-Resident Indians (NRIs)?

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NISM-Series-X-B: Investment Adviser (Level 2) Certification

Chapter 11: Taxation of Equity Products - 3

1 / 50

1. What is the tax treatment of dividend income arising from unlisted equity shares?

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2. How are long-term capital gains from the sale of listed equity shares taxed under section 112A of the Income-tax Act?

3 / 50

3. How is the fair market value determined for the cost of acquisition under the grandfathering provision?

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4. How is the tax under section 115BBD calculated for dividend income received by a domestic company from a foreign company?

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5. What is the tax rate on normal short-term capital gain?

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6. What is the condition for considering the fair market value as the cost of acquisition in the calculation of long-term capital gains?

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7. What is the rate of surcharge on capital gains arising from the transfer of listed equity shares for an individual with a total income above Rs 5 crore?

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8. What is the basis for determining the movement out of a Demat account under the FIFO method?

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9. In Scenario 4, where an equity share is acquired on 01-01-2017 at Rs. 100, its fair market value is Rs. 200 on 31-01-2018, and it is sold on 01-01-2020 at Rs. 50, what is the long-term capital loss?

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10. Which of the following conditions must be satisfied for the concessional tax rate under section 112A to apply?

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11. How are short-term capital gains from the transfer of unlisted preference shares taxed for Foreign Portfolio Investors (FPIs)?

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12. What is the purpose of section 80M under the Income-tax Act?

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13. What is the period of holding for listed shares or securities sold through brokers?

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14. How is short-term capital gain from the sale of equity shares taxed if it does not meet the conditions specified under Section 111A?

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15. What expenses are not allowed as a deduction under section 57 for dividend income?

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16. What is the formula to calculate the fair market value of shares acquired before listing as on 31-01-2018?

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17. What is the treatment of unlisted shares if they are sold after listing on a recognized stock exchange in India?

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18. What is the special tax rate applicable to dividend income received by a domestic company from a foreign company?

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19. In Scenario 2, where an equity share is acquired on 01-01-2017 at Rs. 100, its fair market value is Rs. 200 on 31-01-2018, and it is sold on 01-01-2020 at Rs. 150, what is the long-term capital gain?

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20. What is the tax rate for long-term capital gains from the redemption of listed preference shares if the taxpayer takes the benefit of indexation and foreign currency fluctuation?

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21. Is the conversion of preference shares into equity shares regarded as a transfer?

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22. Which of the following scenarios relaxes the condition of payment of STT at the time of acquisition for certain shares?

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23. What is the holding period required for unlisted preference shares to be treated as long-term capital assets?

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24. How are short-term capital gains from the transfer of unlisted shares taxed for individuals, HUFs, and companies (excluding FPIs)?

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25. How are long-term capital gains from the redemption of unlisted preference shares taxed for non-residents or foreign companies?

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26. What is the tax rate on long-term capital gain from listed equity shares if securities transaction tax (STT) is paid?

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27. How are gains or losses from the sale of listed equity shares treated for tax purposes?

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28. How are short-term capital gains from the transfer of unlisted preference shares taxed for individuals, HUFs, and companies (excluding FPIs)?

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29. In Scenario 3, where an equity share is acquired on 01-01-2017 at Rs. 100, its fair market value is Rs. 50 on 31-01-2018, and it is sold on 01-01-2020 at Rs. 150, what is the long-term capital gain?

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30. What is the tax treatment of dividend income arising from preference shares?

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31. What is the benefit of indexation available for long-term capital gains under section 112A?

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32. When is the benefit of grandfathering applicable for the cost of acquisition of shares?

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33. Is the benefit of indexation available for the cost of acquisition of bonus shares under section 112A?

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34. What is the tax rate on long-term capital gains from the sale of unlisted shares for non-residents?

35 / 50

35. What is the tax rate on dividend income for non-resident individuals and foreign companies?

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36. Under which circumstances is the condition of payment of STT at the time of transfer not applicable for the concessional tax rate under section 112A?

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37. How is the date of transfer determined for transactions of listed shares or securities not conducted through the stock exchange?

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38. What is the tax rate on long-term capital gains from the sale of unlisted shares for resident taxpayers?

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39. How is the period of holding determined for securities held in Demat form?

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40. Which date is considered for determining the fair market value of shares acquired before listing?

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41. In the depository system, how is the FIFO method applied when an investor has multiple security accounts?

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42. How is the cost of acquisition determined for equity shares acquired on or after 01-02-2018?

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43. What is the tax treatment of unlisted shares sold within 24 months?

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44. How are short-term capital gains from the transfer of unlisted shares taxed for Foreign Portfolio Investors (FPIs)?

45 / 50

45. How are gains or losses from the sale of unlisted equity shares treated if the shares are held for not more than 24 months?

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46. What is the tax rate for long-term capital gains from the redemption of listed preference shares if the taxpayer does not take the benefit of indexation and foreign currency fluctuation?

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47. In Scenario 1, where an equity share is acquired on 01-01-2017 at Rs. 100, its fair market value is Rs. 200 on 31-01-2018, and it is sold on 01-01-2020 at Rs. 250, what is the long-term capital gain?

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48. How is the fair market value of shares acquired before listing determined for the cost of acquisition?

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49. What is the rate of surcharge on capital gains arising from the transfer of listed equity shares for an individual with a total income of Rs 1 crore?

50 / 50

50. How is the sale consideration determined for unlisted shares?

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NISM-Series-X-B: Investment Adviser (Level 2) Certification

Chapter 11: Taxation of Equity Products - 4

1 / 25

1. Which regulatory body in India levies the turnover charges in the equity market?

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2. What was the tax treatment of dividend income before the abolition of dividend distribution tax?

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3. Which are the two major stock exchanges in India where shares of a company can be listed?

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4. How is the tax on dividend income calculated for a resident shareholder?

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5. What is dividend income?

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6. Is tax applicable on dividend distributed by Indian companies outside India?

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7. What is brokerage in the context of purchasing and selling equity shares?

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8. What are the Depository Participant (DP) charges in the equity market?

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9. What is the tax rate for long-term capital gains?

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10. What is the effective date of the amendment related to overseas retirement funds introduced in the Finance Act 2021?

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11. What are the two types of income earned from investment in equity products?

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12. What does listing of securities with stock exchanges provide to companies and investors?

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13. How is income from capital gains calculated?

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14. What is the purpose of the Securities Transaction Tax (STT)?

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15. What determines whether capital gains are long-term or short-term?

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16. What is the equity market?

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17. When does capital gains arise?

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18. What does an equity share represent?

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19. Which tax is levied for transferring shares and securities from one person to another?

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20. When is interim dividend chargeable to tax?

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21. Which equity products are discussed in this chapter for tax treatment of capital gains?