Tax on gains from share sales clarified; will help taxpayers

As per the new circular, the assessee can opt to treat income earned from sale of shares or securities as capital gains or business income and the assessment officer cannot question it for the first time


The Ministry of Finance has issued a circular (No6/2016) for providing clarification on taxability on income earned from sale of shares and other securities and whether to treat it as capital gains or business income. 
The circular gives a choice to the assessee to define the income earned from share or securities sale as capital gains or business income. It says, assessing officers in holding whether the surplus generated from sale of listed shares or other securities would be treated as capital gain or business income, shall take into account the following...
a) Where the assessee itself, irrespective of the period of holding the listed shares and securities, opts to treat them as stock-in-trade, the income arising from transfer of such shares/securities would be treated as its business income,
b) In respect of listed shares and securities held for a period of more than 12 months immediately preceding the date of its transfer, if the assessee desires to treat the income arising from the transfer thereof as Capital Gain, the same shall not be put to dispute by the Assessing Officer. However, this stand, once taken by the assessee in a particular Assessment Year, shall remain applicable in subsequent Assessment Years also and the taxpayers shall not be allowed to adopt a different/ contrary stand in this regard in subsequent years;
c) In all other cases, the nature of transaction (i.e. whether the same is in the nature of capital gain or business income) shall continue to be decided keeping in view the aforesaid Circulars issued by the Central Board of Direct Taxes (CBDT).
However, this stand, once taken by the assessee in a particular Assessment Year, shall remain applicable in subsequent Assessment Years also and the taxpayers shall not be allowed to adopt a different/contrary stand in this regard in subsequent years, according to the circular.
"It is reiterated that the above principles have been formulated with the sole objective of reducing litigation and maintaining consistency in approach on the issue of treatment of income derived from transfer of shares and securities. All the relevant provisions of the Act shall continue to apply on the transactions involving transfer of shares and securities," the circular says.
Sub-section (14) of Section 2 of the Income-tax Act, 1961 ('Act') defines the term "capital asset" to include property of any kind held by an assessee, whether or not connected with his business or profession, but does not include any stock-in-trade or personal assets subject to certain exceptions. For shares and other securities, the same can be held either as capital assets or stock-in-trade or trading assets or both. Determination of the character of a particular investment in shares or other securities, whether the same is in the nature of a capital asset or stock-in-trade, is essentially a fact-specific determination and has led to a lot of uncertainty and litigation in the past, the circular pointed out.
Over the years, various courts have laid down different parameters to distinguish shares held as investments from the shares held as stock-in-trade. The Central Board of Direct Taxes ('CBDT) has also, through Instruction No. 1827, dated 31 August 1989 and Circular No.4 of 2007 dated 15 June 2007, summarising the said principles for guidance of the field formations. 
However, disputes continue to exist. This was because the taxpayers were finding it difficult to prove the intention in acquiring such shares or securities. The CBDT, while recognising that major part of shares or securities transactions takes place in respect of the listed ones, and no universal principal in absolute terms can be laid down to decide the character of income from sale of shares and securities, decided to issue the new circular. It expects the clarification will help reduce litigation and uncertainty in this matter.
The Ministry also warned about misuse of these new guidelines. "It is, however, clarified that the above shall not apply in respect of such transactions in shares or securities where the genuineness of the transaction itself is questionable, such as bogus claims of long term capital gain or short term capital loss or any other sham transactions," it added.


Budget proposal on EPF taxation leads to huge confusion
The government says that 60% of EPF corpus if invested in annuity, no tax is chargeable and salaried employees with monthly income up to Rs15,000 will be kept out of purview of the proposed taxation of EPF
The government’s effort to “bring greater parity in tax treatment of different types of pension plans” has led to immense confusion. The budget announced that 40% of the corpus withdrawn at retirement will be tax exempt for both the National Pension System (NPS) and Employee Provident Fund (EPF). The balance corpus withdrawn will be subject to tax. However, if the corpus is transferred to an annuity, it will be tax exempt. (Earlier, the entire 60% of the corpus withdrawn from NPS was taxable and the entire interest earned under EPF was tax-free). This has led to a backlash from EPF subscribers. Attempts to clarify the new norms have led to more confusion over the past 24 hours.
The National Pension System was unattractive because of taxation of the corpus withdrawn on retirement. While it was clear that 60% of the corpus withdrawn is subject to tax, how it will be taxed is still not clear. In order to make the NPS attractive compared to other schemes available, the new tax rule has been introduced. However, making EPF subject to tax led to a huge outcry and confusion on whether the entire 60% of the corpus will be taxed or only the interest component. Contributors to the Employee Provident Fund benefitted with the exempt-exempt-exempt or EEE status.


60% of EPF corpus if invested in annuity, no tax is chargeable

Revenue Secretary Hasmukh Adhia clarified that only the interest accrued on EPF contributions made after 1 April 2016 will come under the new proposal. Therefore, 40% of the interest accrued on contributions made after 1st April will be tax exempt and its remaining 60% will be taxed. This 60% will also be tax exempt if it is invested in pension annuity schemes, he added. This contradicts both the Finance Minister (FM)’s speech and the Finance Bill, which is quite clear about what the government intended to do.
A clarification issued by the Ministry of Finance states that, “It is expected that the employees of private companies will place the remaining 60% of the corpus in annuity, out of which they can get regular pension. When this 60% of the remaining corpus is invested in annuity, no tax is chargeable. So what it means is that the entire corpus will be tax free, if invested in annuity.” This contradicts what Adhia said that only interest will be subject to tax.


If 60% of EPF corpus is withdrawn, full amount subject to tax

A third source of confusion which came from Adhia was that only the interest component will be taxed. So if the above applies to EPF, will the same rule apply to NPS as well? Which means if only the interest component of EPF will be taxed, then will only the gains accrued on NPS contributions be subject to tax. Also, what happens to government employees?
The MoF clarifies that “if he (EPF subscriber) chooses not to put any amount in annuity product the tax would not be charged on 40%.” This means, the balance corpus would be taxed.
They further state, “We have received representations today from various sections suggesting that if the amount of 60% of corpus is not invested in the annuity products, the tax should be levied only on accumulated returns on the corpus and not on the contributed amount. We have also received representations asking for not having any monetary limit on the employer contribution under EPF, because such a limit is not there in NPS. The Finance Minister would be considering all these suggestions and taking a view on it in due course.”

Not applicable for those who are within the statutory wage limit of Rs15,000 per month

Adhia also mentioned that “Small salaried employees with up to Rs15,000 per month income will be kept out of purview of proposed taxation of EPF.” Surprisingly, this found no mention in the Budget speech or the Budget memorandum. The distinction would be made clear in the notification, he added.
The clarification issued by the MoF states that, “The main category of people for whom EPF scheme was created includes the members of EPFO who are within the statutory wage limit of Rs.15,000 per month. Out of around 3.7 crores contributing members of EPFO as on today, around three crore subscribers are in this category. For this category of people, there is not going to be any change in the new dispensation. However, in EPFO, there are about 60 lakh contributing members who have accepted EPF voluntarily and they are highly paid employees of private sector companies. For this category of people, amount at present can be withdrawn without any tax liability. We are changing this.”
There is still a lack of clarity on NPS. Since 40% is tax-free and 40% has to be annuitised, is the balance 20% taxable? There are still different interpretations and confusion on this.
From the Budget Speech
“In case of superannuation funds and recognized provident funds, including EPF, the same norm of 40% of corpus to be tax-free will apply in respect of corpus created out of contributions made after 1 April 2016.”
From the Financial Bill 
“It is further proposed to insert a new clause (12A) in the said section so as to provide that any payment from the National Pension System Trust to an employee on closure of account or his opting out of the pension scheme referred to in section 80CCD, to the extent it does not exceed forty per cent. of the total amount payable to him at the time of closure or his opting out of the scheme, shall be exempt from tax.”
While many were unclear whether these rule will apply to the Public Provident Fund (PPF) as well, the clarification stated that no part of PPF will be taxed. The questions that still need to be answered are:
1. Is government PF and PPF exempt?
2. Is 20% of NPS fully taxable, since 40% is tax-free and 40% has to be annuitised? 




1 year ago

Sign this petition please



1 year ago

It defies all logic that to make NPS attractive, better schemes like EPF are being made unattractive. For all the promises of bringing back black money, all the govt is doing is supporting rural or business community by offering lower tax slabs & what not.

In my blunt and admittedly selfish opinion, Congress may have been a terribly corrupt and incompetent political party, but I will vote for them next time because at least they never dug into my retirement funds. What use is all the BJP led development (if at all) if it comes at the cost of me repeatedly paying tax over my salary!


Anand Vaidya

In Reply to GJay 1 year ago

"Congress may have been a terribly corrupt and incompetent political party, but I will vote for them next time because at least they never dug into my retirement funds."

While you may be angry at BJP, please don't vote for congress.

It is now emerging how Congress played a dangerous game with Ishrat Jahan - a suicide bomber and hid the facts. One gov officer - Secretary (KSV Mani) was physically and mentally tortured to sign on fake documents. Congress is pure criminal.

What we can do is scold, pressure BJP govt and set things right. Try that with Congress....

Mr Jitendra

1 year ago

And they just now clarified on NDTV that the Government employees PF will NOT be taxed that comes from the GPF (Government Provident Fund). Probably the govt was fearing a backlash from within their own bureaucracy and they issued this clarification. This means, only EPF is in line of fire which comes under EPFO and CITU and INTU unions are the ones to protest.

It is complete wrong and unethical to tax retirement savings of employees in a developing economy when the state itself puts its subjects to high inflation from time to time along with pollution, bad roads, crowded trains, poor service etc.
Last year they brought the ITR tax return forms with declaration of all bank accounts with IFSC codes.

I dont know how many more mistakes will this government do upto runup of 2019 elections.


1 year ago

Yeah it is confusion, and anxiety.

Salary people's only saving mostly PF only unfortunately. Now taxing them also one way or other is last nail in the coffin of salaried class.

It's apparent Government looks for additional source of revenue, or wanted to maintain large pool of PF for its debt (bonds) with liquidation intervals tightened. That is sick. They don't want to do -what US Governments had done to Social security -bringing close to bankruptcy.

Keep EPF remain as it is!

Urvish Chitalia

1 year ago

Taxing EPF by whatever way is a very wrong thing to do, morally and ethically.

The argument that EPF was taxed to make the NPS more attractive or achieve parity is one of the most foolish arguments ever heard.

The BJP should be ready to loose the next general elections and the upcoming state elections too.

These people are taking the salaried class for granted. But this is too much.

EPF is my money and I should be given it in full and whenever I want it.

India's 2016-17 budget credit positive: Moody's and Fitch Ratings

According to Moody's while the budget is moderately positive for most sectors, it is negative for public sector banks


Global credit rating agencies -- Moody's Investors Service (Moody's) and Fitch Ratings -- termed India's fiscal budget for 2016-17 as credit positive for sovereign rating, but pointed out certain uncertainties.
"The budget is modestly credit positive for the sovereign, since it indicates a continued commitment to gradual fiscal consolidation by bringing down fiscal deficits to 3 percent over the next two years," said Atsi Sheth, a Moody's associate managing director for the Sovereign Risk Group, in a statement.
"However, the proposals did not contain significant measures to address structural fiscal challenges, such as the government's low tax revenue base and the vulnerability of government finances to economic shocks," added Sheth.
"This situation suggests that any deficit reduction will come from either cyclical upswings or tactical fiscal management, rather than a broad-based fiscal consolidation strategy," Sheth said.
According to Moody's while the budget is moderately positive for most sectors, it is negative for public sector banks.
The credit rating agency said the budget is credit negative for public sector banks due to its insufficient allocation of capital for the sector, as the government has stuck to the capital infusion road map announced last year, budgeting Rs.25,000 crore in capital injections.
However, increased recognition and provisioning for non-performing loads (NPL) will require a corresponding front-ending of capital requirements, which suggests that capital constraints will remain a key credit weakness for public sector banks, Moody's said.
The budget's changes on tax and duties are credit positive for energy and commodity producers, but negative for auto-makers.
Finally, the budget is positive overall for India's securitisation markets as changes in the distribution tax norms for securitisation trusts will improve investors' post-tax returns and make investments in securitisation products more appealing, which could attract a new class of investors to the asset class.
According to Fitch Ratings, the budget contains a number of elements that could be positive from a sovereign rating perspective over the medium term, but uncertainties regarding implementation of the reform agenda and meeting targeted revenue growth remain.
Fitch Ratings said the Indian government retains its vision on how to structurally improve the economy and create sustainable growth and cited reforms relating to financial sector, agriculture and liberalisation of the foreign direct investment regime announcements.
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.



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