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7.
Under Section 54EC of the Income Tax Act, capital gain arising from transfer of long-term capital assets
(other than those exempt under section 10(38) of the Income Tax Act) is exempt from tax, if the capital
gains are invested in certain notified bonds within a period of six months from the date of transfer, up to a
maximum limit of Rs. 5 million during any financial year for a period of three years. For investments made
on or after 1 April 2007, the notified bonds are
a)
NHAI, constituted under section 3 of National Highways Authority of India Act, 1988 and notified by
the Central Government in the Official Gazette for the purpose of this section; or
b)
RECL, a company formed and registered under the Companies Act and notified by the Central
Government in the Official Gazette for the purpose of this section;
If only part of the capital gain is invested, the exemption will be proportionately reduced. However, if the
new bonds are transferred or converted into money within three years from the date of their acquisition the
amount so exempted will be chargeable to tax.
8.
Under section 54F of the Income Tax Act, long-term capital gains (in case not covered under section
10(38) of the Income Tax Act), arising to an individual or Hindu Undivided Family (“HUF”) on transfer of
shares of the Company will be exempt from tax, if the net consideration from such shares are used for
purchase of residential house property within a period of one year before or two years after the date on
which the transfer took place or for construction of residential house property within a period of three years
after the date of transfer. If only a part of the net consideration is so reinvested, the exemption shall be
proportionately reduced.
9.
Under section 111A of the Income Tax Act, short-term capital gains (i.e. if shares are held for a period not
exceeding twelve months), arising on transfer of an equity share, are taxed at the rate of 15% (plus
applicable surcharge & cess) in cases where securities transaction tax has been levied. Further, if the gross
total income of the shareholder includes any short term capital gains referred to above, deduction under
Chapter VI-A of the Income Tax Act shall be allowed from the gross total income as reduced by such short
term capital gains.
10.
Under section 112 of the Income Tax Act, long-term capital gains are subject to tax at a rate of 20% (plus
applicable surcharge and cess) after indexation as provided in the second proviso to section 48. However,
in case of listed securities or units the amount of such tax could be limited to 10% (plus applicable
surcharge and cess) without indexation benefit, at the option of the shareholder, in cases where securities
transaction tax is not levied.
Special Tax Benefits
11.
There are no special tax benefits available to the resident shareholders.
D.
Benefits to Non-Resident Indians / Non Residents Shareholders (Other than FIIs)
General Tax Benefits
1.
Under section 10(34) of the Income Tax Act, any income by way of dividends referred to in section 115-O
(i.e. dividends declared, distributed or paid on or after 1 April 2003) received by a non-resident Indian
shareholder (i.e. an individual being a citizen of India or Person of Indian origin who is not a ‘resident’) on
the shares of the Company, is exempt from tax.
2.
Under section 10(38) of the Income Tax Act, any long term capital gains arising to a shareholder from
transfer of long term capital asset being an equity share in a Company or a unit of an equity oriented fund
would not be liable to tax in the hands of the shareholder if the following conditions are satisfied:
a)
The transaction of sale of such equity share is entered into on or after October 1, 2004; and
b)
The transaction is chargeable to securities transaction tax.
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3.
Section 14A of the Income Tax Act restricts claim for deduction of expenses incurred in relation to income
which does not form part of the total income under the Income Tax Act viz income received under sections
10(34), 10(35), etc. Thus, any expenditure incurred to earn the said income is not a tax-deductible
expenditure.
4.
Under section 36(1) (xv) of the Income Tax Act, securities transaction tax paid by a shareholder in respect
of the taxable securities transactions entered into in the course of his business, would be allowed as a
deduction if the income arising from such taxable securities transactions is included in the income
computed under the head “Profit and gains of business or profession”. As such, no deduction in respect of
amount paid on account of securities transaction tax will be allowed in computing the income chargeable to
tax as capital gains.
5.
Section 48 of the Income Tax Act contains special provisions in relation to computation of long term
capital gain on transfer of an Indian company’s shares by non-residents. The Computed long term capital
gain arising on transfer of shares in case of non residents has to be done in the original foreign currency,
which was used to acquire the shares. The capital gain computed in original foreign currency is then
converted into Indian rupees at the prevailing rate of exchange.
6.
Under Section 54EC of the Income Tax Act, capital gain arising from transfer of long-term capital assets
(other than those exempt under section 10(38) of the Income Tax Act) is exempt from tax, if the capital
gains are invested in certain notified bonds within a period of six months from the date of transfer, up to a
maximum limit of Rs. 5 million during any financial year for a period of three years. For investments made
on or after 1 April 2007, the notified bonds are
a.
NHAI, constituted under section 3 of National Highways Authority of India Act, 1988 and notified by
the Central Government in the Official Gazette for the purpose of this section; or
b.
RECL, a company formed and registered under the Companies Act and notified by the Central
Government in the Official Gazette for the purpose of this section;
If only part of the capital gain is invested, the exemption will be proportionately reduced. However, if the
new bonds are transferred or converted into money within three years from the date of their acquisition the
amount so exempted will be chargeable to tax.
7.
Under section 54F of the Income Tax Act, long-term capital gains (in case not covered under section
10(38) of the Income Tax Act), arising to an individual or HUF on transfer of shares of the Company will
be exempt from tax, if the net consideration from such shares is used for purchase of residential house
property within a period of one year before and two years after the date on which the transfer took place or
for construction of residential house property within a period of three years after the date of transfer. If
only a part of the net consideration is so reinvested, the exemption shall be proportionately reduced.
8.
Under section 111A of the Income Tax Act, short-term capital gains (i.e. if the shares are held for a period
not exceeding twelve months), arising on sale of listed equity shares are taxed at the rate of 15% (plus
applicable surcharge & cess) in cases where securities transaction tax has been levied. Further, if the gross
total income of the shareholder includes any short term capital gains referred to above, deduction under
Chapter VI-A of the Income Tax Act shall be allowed from the gross total income as reduced by such short
term capital gains.
9.
Under section 112 of the Income Tax Act, long-term capital gains (i.e. if shares are held for a period
exceeding twelve months), arising on transfer of shares in the Company, shall be taxed at a rate of 20%
(plus applicable surcharge and cess). However, in case of listed securities or units, the amount of such tax
could be limited to 10% (plus applicable surcharge and cess), without indexation benefit, at the option of
the shareholder, in cases where securities transaction tax is not levied.
10.
Under section 115-I of the Income Tax Act, a non-resident Indian shareholder (as defined therein) has an
option to be governed by the provisions of Chapter XII-A of the Income Tax Act, viz. “Special Provisions
Relating to Certain Incomes of Non-Residents” which are as follows: -
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