SynopsisAn individual who has sold equity shares and/or equity mutual funds is eligible for tax exemption of up to Rs 1 lakh on long term capital gains. However, LTCG tax exemption can be claimed only if STT was paid at the buying anf selling security. There are certain exceptions where LTCG exemption is applicable even if STT shown in the statement is zero.
If equity shares and equity mutual funds (MFs) are sold after being held for one year or more, then long-term capital gains (LTCG) up to Rs 1 lakh are exempted from income tax in a financial year. However, this tax exemption is applicable to only those stocks and mutual funds that satisfy certain conditions.
According to the Income-tax Act, 1961, an individual is eligible to claim tax exemption on LTCG from transactions involving equity shares and equity-oriented mutual funds if the following conditions are satisfied:
a) In case of shares, securities transaction tax (STT) must have been paid at the time of purchase and it should have been deducted at the time of sale
b) In case of equity-oriented mutual funds, STT must be deducted at the time of redemption
However, it is possible that shares were purchased before STT was introduced or STT does not reflect in the broker statement or capital statement as it was less than 50 paise. Are you still eligible to claim tax exemption of up to Rs.1 lakh on LTCG?
If STT was not paid at the time of acquisition
S Vasudevan, Executive Partner, Lakshmikumaran & Sridharan Attorneys, says, “Individuals are eligible to claim tax exemption on LTCG gains up to Rs 1 lakh in a financial year even if STT was not paid at the time of purchase, in certain exceptional circumstances. The Central Board of Direct Taxes (CBDT) via a notification dated October 1, 2018 has expressly waived-off this STT-related condition in cases where the equity shares were bought before 1st October 2004.”
STT came into effect from October 1, 2004. Hence, an individual who has bought shares before this date is not required to pay STT on the purchase. However, STT is applicable if those stocks are sold through a listed stock exchange.
A similar exemption is available for shares allotted to employees under an employees’ stock option plan (ESOP). Vasudevan says, “If the shares were allotted to employees under ESOP scheme according to SEBI guidelines, the tax exemption on LTCG up to Rs 1 lakh will be available, provided STT is paid at the time of sale. However, if the SEBI guidelines are not met at the time of allotment or STT is not paid at the time of sale, then LTCG tax exemption of up to Rs 1 lakh cannot be claimed.”
The CBDT had issued a notification dated June 5, 2017, that provided a list of transactions that are exempt from payment of STT at the time of purchase, says Sudhakar Sethuraman, Partner, Deloitte India. “The exempted transactions’ list includes shares allotted under the ESOP plan of the employer. However, it is important that at the time of selling shares under ESOP plan, it happens through a listed exchange and STT is paid at the time of sale to be eligible to claim LTCG tax exemption of Rs 1 lakh,” Sethuraman.
If STT payment is not reflecting on the statement
Usually, 50 paise is ignored during income tax calculations. It is possible that when mutual funds or equity shares are sold, the STT amount is too small (i.e., less than 50 paise) and so does not reflect in the broker statement or on the mutual fund statement.
Vasudevan says, “All the listed equity shares are subjected to STT and the liability to deposit such STT is on the recognised stock exchange, irrespective of whether the stock exchange has collected it from the buyer or seller of shares. Hence, the buyer/seller can make a reasonable assumption that the listed equity shares have been subjected to STT during a transaction and may accordingly claim tax exemption on LTCG up to Rs 1 Lakh, even if STT is not mentioned in the statements. Similarly, all units of equity mutual funds are subject to STT at the time of sale. The liability to deposit STT is on the trustee of the mutual fund, irrespective of whether the STT has been collected from the investor or seller. Hence, the investor can make a reasonable assumption, even in the absence of a statement, that STT has been paid on the units of equity mutual funds.”
Sethuraman says, “Payment of STT at the time of selling equity shares and equity-oriented mutual funds is an important condition to claim the concessional tax rate of 10% (without indexation) and exemption of up to Rs 1 lakh in a financial year. If the broker statement does not reflect STT, a taxpayer can claim the tax exemption on LTCG based on the broker statement by indicating that the sale or purchase of shares has been done via a listed exchange. In case of equity-oriented mutual funds, the statement will generally reflect the STT deducted at the time of redemption. If not, the taxpayer can approach the mutual fund house concerned to confirm the deduction.”
What is STT?
STT or securities transaction tax is levied at the time of purchase and sale of equity shares and other instruments such as derivatives or bonds, and also at the time of redemption of equity-oriented mutual funds.
The STT rate differs depending on the security. In case of equity shares, STT is levied at 0.10% at the time of purchase and sale. It is levied on purchase and sale price. For equity mutual funds, STT is levied at 0.001% at the time of redemption of those funds.
(Originally published on Aug 25, 2022, 09:19 AM IST)
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