Taxation in Securities Markets – Capital Gains, Equity Shares, Mutual Funds, and Futures & Options

Table of Contents

1. Common Factors for the Computation of Capital Gains
2. Taxation of Equity Shares
3. Taxation of Mutual Funds
4. Taxation of Futures & Options
5. NISM-Series-XX: Taxation in Securities Markets Certification Examination

1. Common Factors for the Computation of Capital Gains

1.1 Period of holding to become long-term capital asset

1.2 Indexation Benefit Allowed & Not Allowed

Allowed

• Capital Indexed Bonds
• Sovereign Gold Bond
• Unlisted Equity Shares
• Preference Shares
• Immovable Property
• Physical Gold
• Other Capital Assets (except specified in ‘Not Allowed’)

Not Allowed

• Listed Equity Shares
• Shares purchased by a non-resident
• ReIT & InVIT Units
• Debentures
• Other Bonds
• Units of Equity-oriented MFs
• Non-equity Mutual Funds
• Purchase of:

1. 1. Unlisted securities by non-resident
   2. Securities by an FPI
   3. Units in foreign currency by offshore fund
   4. GDRs in foreign currency

2. Taxation of Equity Shares

2.1 Are you a trader or an investor?

2.2 How to classify yourself as a Trader or Investor?

2.3 Taxation for Investor in Equity Shares

2.4 Tax on Long-term capital gain

2.5 Tax on Short-term capital gain

2.6 Tax Rates on Equity Shares

2.7 Taxation for Trader in Equity Shares

2.8 Tax on Business Income

2.9 Tax on Speculative Business Income

The tax treatment of speculative and non-speculative business is same except the following:

3. Taxation of Mutual Funds

3.1 About Mutual Funds

Mutual funds are the funds which collect money from the investor and invest the same in the capital market for their benefit. Mutual funds invest in a variety of instruments such as equity, debt, bonds, etc. Investments of a mutual fund are managed by the Asset

Management Company through fund managers. All the mutual funds are registered with the SEBI and they function within the provisions of strict regulation created to protect the interests of the investor.

3.2 Types of Mutual Funds

Until Assessment Year 2023-24, mutual funds were categorized into two types for taxation purposes:

1. Equity-oriented Mutual Funds and
2. Other Funds. However, with effect from Assessment Year 2024-25, mutual funds are now classified into three types for taxation purposes:

• • Equity-oriented Mutual Funds,
  • Hybrid Mutual Funds, and
  • Debt/Specified Mutual Funds.

3.3 Tax on different Mutual Funds

3.4 Taxation of Mutual Funds

3.5 Tax on Dividend from Shares or Mutual Funds

4. Taxation of Futures & Options

4.1 What is Futures and Options?

Derivatives, popularly known as Futures and Options (F&O), is quite popular among investors who invest in the stock market.

Derivatives are financial products whose value is derived from the real asset. An equity derivative is a class of derivatives whose value is derived from one or more underlying equity securities.

A ‘futures’ is a contract for buying or selling underlying security or index on a future date, at a price specified today.

An ‘option’ is a contract that gives the right, but not an obligation, to buy or sell the underlying security or index on or before a specified date, at a stated price. Options are categorized into 2 categories – Call Options and Put Options. Option, which gives the buyer a right to buy the underlying asset, is called ‘Call option’ and the option which gives the buyer a right to sell the underlying asset, is called ‘Put option’.

4.2 Tax on Futures and Options

The transactions in Futures and Options are treated as normal business transactions.

Thus, the tax treatment is same as in case of a normal business.

However, there are different rules for computation of turnover from F & O transactions.

4.3 Computation of Turnover from F&O

Turnover is calculated as under:

1. In case of squared off transactions, total of favourable and unfavourable differences is taken as turnover;
2. Premium received on sale of options is also to be included in turnover;
3. In respect of any reverse trades, the difference thereon should also form part of the turnover.
4. In case of an open position as at the end of the financial year, the turnover arising from the said transaction should be considered in the financial year when the transaction has been actually squared off.
5. In case of delivery based settlement in a derivatives transaction, the difference between the trade price and the settlement price shall be considered as turnover.

4.4 Example (For Illustration purpose only)

Answer

5. NISM-Series-XX: Taxation in Securities Markets Certification Examination

An examination for professionals who want to understand various aspects of taxation applicable to Securities Markets and the diverse securities traded in these markets.

5.1 Who can take Series XX: Taxation in Securities Markets Certification Examination?

• All those Individuals who want to know about the different taxation aspects in the Securities Markets.
• Interested Students/ Professionals
• Any other individuals interested in gaining knowledge of taxation.

5.2 What will you learn in NISM-Series-XX: Taxation in Securities Markets Certification Examination?

• Basics of the Indian Securities Market-Structure, Participants, Products and Features.
• Basic concepts in Taxation, Capital Gains, Sources of Income etc.
• Taxation of products available in the market viz., Equity, Debt, ESOPS, Exchange Traded Funds, Alternate Investment Funds, Real Estate Investment Trusts, Infrastructure Investment Trust and Derivative products.
• Taxation in the hands of the Intermediaries, Foreign Portfolio Investors, IFSC etc.

5.3 Assessment Structure

• Computer-based examination with multiple choice questions.
• Test duration: 2 hours
• There shall be negative marking of 25% of the marks assigned to a question.
• Passing score: 60%
• Certificate Validity : 3 years
• Fees: Rs. 1770
• No. of questions: Total 75 questions of (50 questions of 1-mark each and 25 questions of 2-marks each, adding to a total of 100 marks)

5.4 Function-wise NISM Certifications

Securities Market Foundation (Basic Certification Common for all)

Product Sales

• Currency Derivatives
• Interest Rate Derivatives
• Equity Derivatives
• Commodity Derivatives
• Common Derivatives

MF/PMS/AIF

• Mutual Fund Distributors
• Mutual Fund Foundation
• AIF (Cat I & II) Distributors
• AIF (Cat III) Distributors
• PMS Distributors
• Portfolio Managers

Advisory

• Investment Advisers (Level 1)
• Investment Advisers (Level 2)
• Research Analyst
• Retirement Adviser (mandated by PFRDA)

Operations

• RTA – Corporate
• RTA – MF
• Depository Operations
• Securities Operations & Risk Management
• Merchant Banking

Compliance & Audit

• Securities Intermediaries Compliance (Non-Fund Activities)
• Taxation in Securities Markets
• Social Auditors