Capital Gains and Dividend Taxes on Shares and Mutual Funds

by Manshu on April 11, 2011

in Tax

This is another post from the Suggest a Topic page, and this time we’re going to take a look at how capital gains – short term and long term as well as dividend distribution taxes are charged on shares, equity mutual funds, debt mutual funds, and Gold ETFs.

The way I have gone about creating this list is to look at the tax section of various mutual funds, and then refer back to the relevant act.

In a few cases I’ve been unable to make heads or tails of the act so I have not linked back to the act in those cases.

The most helpful page to get started was the UTI Tax page which has laid out the mutual fund taxation in very good detail. You can find similar pages on all mutual fund websites, but I’m linking to them because I found them quite useful.

Before you go on to read the table I should remind you that I’m not a tax expert and while this table can serve as a good starting point you shouldn’t file taxes just based on this!

Asset Class Classification as Short term or Long term Long Term Capital Gains Short Term Capital Gains Dividend Distribution Tax
Shares Less than a year is short term and more than a year is long term Exempt under section 10 (38) 15% under section 111A 15% Under Section 115 – O
Equity Mutual Fund Less than a year is short term and more than a year is long term Exempt under section 10 (38) 15% under section 111A Exempt under section 115 R
Debt Mutual Fund Less than a year is short term and more than a year is long term 10% without indexation or 20% with indexation whichever is lower plus surcharge and cess Gains taxed on investor’s slab. 12.5% under section 115 R
Money Market Funds & Liquid Funds Less than a year is short term and more than a year is long term 10% without indexation or 20% with indexation whichever is lower plus surcharge and cess Gains taxed on investor’s slab. 25% under section 115 R
Gold ETFs They are treated exactly like Debt Mutual funds.

 

You don’t pay the dividend distribution tax – the company or the mutual fund pays that, but it still reduces the amount of income you will get so I have included it here. Dividends are not taxable in your hand since such tax has already been paid by either the company or the mutual fund.

The original question also touched upon how someone with multiple transactions could keep track of the taxes, and calculation, but I’m afraid I don’t have any input on that.

Please do let me know if you see any errors or have any other comments!

{ 32 comments… read them below or add one }

Lokesh April 11, 2011 at 7:34 pm

thank you. would have been better if you put up a similar table for ‘post DTC’ scenario.

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Manickkam April 12, 2011 at 12:07 am

Post DTC, there will be tax on long term gains on stock market as well and it will be considered similar to the capital gains made in the real estate or such similar means and the short term gains tax remains the same.

Regards,
Manickkam.

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Manshu April 12, 2011 at 4:14 am

Thanks Manickkam – any thoughts on debt funds?

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Manshu April 12, 2011 at 4:17 am

Sure Lokesh – in another post. I had read the first draft of DTC that came out but since then there have been several changes, and I have not kept up with them, primarily because I feel they are going to change some more now. But I will create a post like the one you’re saying because I see a lot of other folks are looking for that info as well.

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Radhika April 11, 2011 at 9:34 pm

No tax on income generated by selling shares? I’ve been paying 10% on the profit made – even if it was long term holding. Could you please clarify?

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mithlesh April 11, 2011 at 11:41 pm

No way you should be paying any tax if you are selling shares after holding the shares for more than 12 months from the date of purchase ( assuming you are paying STT on buying the shares)

Manshu: Thanks a lot for bringing this topic on request. This would be a great help for stock market investors.

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Manshu April 12, 2011 at 4:18 am

Glad, you found it useful Mithlesh.

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Manshu April 12, 2011 at 4:16 am

There is no long term capital gains on equity shares if you are a resident and have paid STT on shares (which under normal circumstances you would), so you shouldn’t have paid any taxes if these conditions satisfied.

What did the CA say?

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Radhika April 13, 2011 at 10:39 pm

Thanks for the replies. Had a word with my CA. The problem was, I did not have a track of what shares were bought one year ago and what were actually short term gains. So my CA made me pay 10% tax!
Is there a way to track the these transactions? If I keep accumulating a particular share and sell it after some time, how to make sure it infact comes under longerm or short term? Keeping track of it manually is such a big pain. But looks like there’s no other go. Wish there was some easy tool to track portfolio.

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Manshu April 14, 2011 at 11:16 am

Oh, that’s interesting – he took the better safe than sorry approach, and I guess that’s the right thing to do. I’m afraid I’m not aware of any easy way to do this, and you can only do so by maintaining a spreadsheet or something.

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Anil September 6, 2012 at 7:39 pm

Hi,
You can use perfios.com for tracking this. It’s a great tool to calculate your capital gains and consolidate all your investments

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Vishal April 12, 2011 at 3:25 am

Manshu,

Good tabulation. However, it will be helpful for readers if you divide the shares category into the one on which STT has been paid (Bought or sold in the market) and shares on which no STT has been paid (Buyback, Open offer, Off-market transactions). In the former case, long term capital gains (LTCG) is exempt whereas short term (STCG) is 15%. In the later case, LTCG is 20% with indexation / 10% without indexation while STCG is as per the slab rates.

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Manshu April 12, 2011 at 4:13 am

Sure, for this post I wanted to cover the basic aspects that affect everyone, but I’d expand it with your suggestions in the future. Thanks.

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Mike May 4, 2011 at 4:21 am

What about the stocks which came to us as RSUs from the company? When RSUs vest, I have seen that TDS is done on it – for example, if 10 RSUs vest for me, I get only 7 (after taking 30% off) – how do we calculate the taxes on gains that accrue by selling these stocks?

Thanks,
-nagp

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Manshu May 4, 2011 at 4:14 pm

Don’t know about that Mike – sorry.

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Umesh November 28, 2011 at 5:47 pm

Hi Vishal/Manshu

You wrote that shares on which no STT has been paid, LTCG is 20% with indexation / 10% without indexation.

But what about the shares bought some years back when there was no STT, and purchase value is also not known, as no record is available (So how to calculate LTCG, if LTCG is not tax exempt)

Also, a case of a friend of mine, his father bought some shares in his name, some 20 years back, which he want to sell. He has no demat account. Is demat account necessary or he can sell these shares as off market sale. What will be the procedure. The current market value is approximately 1.25 Lakhs. Please help.

Thanks

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Manshu November 29, 2011 at 10:04 pm

I really have no idea how to calculate capital gains if purchase price is not known.

Also, as far as I know you will have to dematerialize the shares before selling them. The only exception I know of is that some local brokers sometimes buy these shares at a discount to the market price.

I’m not very informed about this though so you should definitely seek someone else’s opinion as well.

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Umesh December 1, 2011 at 1:09 pm

Thanks Manshu

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Shad March 19, 2012 at 11:26 am

Hi Manshu,
Many thanks for this info. btw, are index funds/ ETFs (non-gold) also taxed like shares ?

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Manshu March 19, 2012 at 3:10 pm

Yes, if they are based on equity like the Nifty BeES ETF, but if they are based on debt then they will be treated as debt funds.

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VIJAY March 22, 2012 at 12:46 pm

I took the 1000 shares of the Company ALFA LAVAL india between 1980-93 and return in tendering (REVERSE BOOK BUILDING PROCESS Or called as DELISTING) . Company returns 4000 price per shares thus total amount to be 40 Lac. If i returns the shares in delisting, will the 40 Lac amount becomes TAX-FREE or long term capital gain is applicable?

Vijay

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Manshu March 24, 2012 at 11:46 pm

I would imagine it is tax free since it is long term equity but you are better off consulting a CA for this.

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VIJAY March 22, 2012 at 12:48 pm

SHares alloted to the employees of the company (under employee stock option) and returned in delisting (off market) after 10-12 years , Tax is applicable or the amount is TAX-FREE. How I know that STT is paid or not? Who will pay STT?

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anand June 5, 2012 at 6:31 am

http://www.stockgaincalc.com
a web based simulator to calculate capital gain for stocks sold.

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anand June 27, 2012 at 7:42 am
ankurm June 27, 2012 at 2:42 pm

Any idea, why Govt penalises debt investors by charging at higher tax rate vs equity/equity MF investors? Why should fixed income investor be penalised? Is this how we will increase depth of debt markets?

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Jacques July 3, 2012 at 4:29 pm

Is there a way to ask for refund of Short Term Capital Gains TDS if my Taxable Income for 2010-2011 is less than 1.8 lakhs. I am A NRI

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varun July 4, 2012 at 10:47 pm

I am a resident indian and have bought shares of us companies in US stock exchange.
how will be the capital gain/loss computed and what are the tax implications?

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Manoj Mehra October 29, 2012 at 6:04 pm

Hi,
I am a NRI with an Indian DEMAT account. I purchased shares about 3 years ago and would like to know how to go about saving taxes on sale of these shares. I was informed by the bank about the following rates:

Further, for NRI’s as per the Income Tax Act, 1961, the TDS is to be
deducted on the gains on sale of ETF’s which are as under:

1. Short Term Capital Gain @ rate of 30.9%
2. Long Term Capital Gain @ rate of 20.6%

I am at loss, the act says Long term capital gains is exempt from taxes so why would the bank deduct these from the proceeds.

Please help.
Manoj

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VikasG January 10, 2013 at 2:57 pm

Hello everyone, I have mutual funds in a couple of different AMCs. Now that tax time is approaching, what’s the best way to generate the capital gains statement for each MF? Is it possible to generate the capital gains across all MFs in one statement?

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Taxman February 23, 2013 at 8:02 pm

Excellent article. However, Under Section 194K of the Income-tax Act, 1961, tax will be deducted at source @ 15% on income / dividend distribution on units of Mutual Fund. Such deduction will be made only if payments to any person are in excess of Rs.10,000 per annum per Scheme of the Mutual Fund. In the table, under the dividend distribution tax category, you have mentioned that equity mutual fund is exempt from DDT.

Reference: http://www.mutualfundsindia.com/icici/offer/18.htm

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Manshu February 25, 2013 at 5:45 am

Thanks for bringing that out.

What about 115(R) that exempts this? Is that section no longer valid?

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