Capital Markets: Taxation and Portfolio Review

The rules changed materially on 23 July 2024, and a holding bought before that date is not necessarily taxed like one bought after it.

• The present structure: Long-term gains at twelve and a half per cent without indexation, with listed equity and equity-oriented funds under section 112A carrying an exempt slice of ₹1.25 lakh a year. Short-term gains on listed equity under section 111A at twenty per cent.
• The grandfathered cost: For listed equity held on 31 January 2018, the cost for section 112A purposes is computed with reference to the highest price quoted on that date. It is frequently ignored, and ignoring it overstates the gain.
• Debt and other funds: Taxed by reference to the date of purchase and the fund's equity exposure, with the categories that followed the 2023 and 2024 changes behaving differently from one another.
• Buybacks and dividends: Consideration on a buyback is now treated as a dividend in the shareholder's hands, which changed the arithmetic of participating in one. Dividends are taxable at slab rates with withholding at source.

Derivatives are taxed as business income, which brings books, audit and a different set of due dates. It is the area where returns are most often filed wrongly.

• Head of income: Futures and options are a non-speculative business; intraday equity is speculative business, and the two sets of losses do not set off against the same things. Delivery-based holdings remain capital gains.
• Turnover, and why it matters: Turnover for a derivatives business is not the contract value. It is computed on the prescribed basis, and it determines whether a tax audit under section 44AB is required at all — an error here produces either an unnecessary audit or a missing one.
• What is deductible: Brokerage, exchange and regulatory charges, securities transaction tax, data and platform subscriptions, advisory fees, interest on money borrowed for the business and a proportion of premises and connectivity, where the records support them.
• Losses: Non-speculative business loss set off against other heads except salary, carried forward for eight years; speculative loss against speculative income only, for four. Both require the return to be filed by the due date, which is the condition most often lost.
• Advance tax: A trading business pays in instalments through the year, and the interest under sections 234B and 234C is the usual avoidable cost.

The department already holds your trading data. The return is read against it, and a difference becomes correspondence.

• Reconciling before filing: Broker statements and the capital gains report against Form 26AS and the annual information statement, with mismatches resolved through the feedback mechanism rather than left to be queried.
• Schedule by schedule: Capital gains with the section 112A statement, business income with the books where derivatives are involved, and the balance sheet and profit and loss schedules that a trading business has to complete.
• Foreign holdings: Shares, options and accounts held outside India are reportable in Schedule FA whatever their value and whether or not there is income, and the penalty for omission does not depend on the tax involved.
• Loss harvesting, done correctly: Realising a loss against gains of the right character before the year closes is arithmetic rather than a view on the market, and it is set out in our note on what has to be done before 31 March.

An employee holding shares in a listed employer, often a foreign one, has two taxable events and a reporting obligation, and usually hears about the third from a notice.

• Exercise and sale: The spread at exercise or vesting is a perquisite taxed as salary; the gain on sale is capital gains with a cost equal to the value already taxed. Paying tax twice on the same amount is the classic error.
• Foreign listed shares: Holding period and rate differ from Indian listed shares, and foreign tax paid may be creditable under the relevant treaty against Indian tax on the same income.
• Schedule FA and the foreign asset disclosure: Shares held abroad through an employer plan are reportable, and where earlier years were missed, the position is dealt with in our note on the FAST-DS window.

What India may tax on a market investment depends first on residential status and then on the treaty, and both are determined before the gain arises rather than after it.

• Residential status: The number of days decides whether your global income is within the Indian net at all. Worked through in our note on resident, RNOR or non-resident.
• Accounts and the route: Portfolio investment through the designated route, the account the investment is held in, and the repatriation that account permits.
• Withholding on redemption: Tax deducted at source on a non-resident's sale, the lower deduction certificate where the actual gain is smaller than the deduction, and the treaty rate where one applies.
• Treaty relief: Where the agreement allocates taxing rights on capital gains, and the tax residency certificate and Form 10F needed to claim it.

We review a portfolio as part of a tax and reporting engagement: concentration, the holding periods, the realised and unrealised position, and what a proposed rebalancing would cost after tax.

That is a review of consequences, and it is the part a chartered accountant is equipped to do.

• What a review covers: Asset allocation against stated objectives, exposure concentrated in a single stock or sector, holding periods approaching the long-term threshold, carry-forward losses available to absorb a gain, and the after-tax cost of a switch.
• What it does not cover: We are not registered with the Securities and Exchange Board of India as an investment adviser or as a research analyst, and nothing on this page or in our engagement is a recommendation to buy, sell or hold any particular security. Any observation on a holding is incidental to the professional service we are engaged for.
• Where a recommendation is wanted: Engage a SEBI-registered investment adviser or portfolio manager. We will work alongside them on the tax and reporting consequences of what they advise, which is where the two roles meet.
• In full: The same position is set out in our terms of use, which govern everything published here.