The Hindu Business Line : Tax-free gift from wife

Last year she had these shares transferred to her married name and thereafter gifted the same to me. I sold the shares through a recognised stock exchange after holding the same for about six months.

Will the gain on sale of the shares be taxed in my hands or hers? — Rajat

No tax implications will arise in the hands of your wife on the gift made by her to you. Section 56(1)(v) only seeks to tax a sum of money received without consideration and not a gift which is in kind.

Further this provision also seeks to exclude from the ambit of tax, a sum of money given without consideration to a relative as defined in the provision which also includes the spouse of an individual.

The capital gain arising from the sale of the shares will again not be taxed but will be exempt under Section 10(38) since the shares have been held by you and your wife for a period exceeding 12 months and further since the shares have been sold through a recognised stock exchange where securities transaction tax would have been paid at the time of sale.

You may note that Section 2(42A) specifically provides that the period of holding of the previous owner is also to be taken into account in determining whether the gain is long term or short term in certain circumstances which also includes a gift.

I am a salaried employee. I trade in shares through an authorised broker and occasionally I also trade in futures and options (F&O). What are the tax implications of the profit or loss from trading in F&O?

Can the loss from trading in futures and options be set off against my salary income? What are the tax implications on trading in shares?

When should the tax be paid on the trading in shares and F&O as tax has been deducted at source by my employer on the salary income? — Ramabadran

The trading in F&O will normally be considered as a business and be taxed under the head profits and gains of business or profession.

F&O are transactions done without actual delivery and therefore by virtue of Section 43(5) would be treated as a speculative business except if the transaction is carried on through a registered broker or sub-broker or by banks or mutual funds and where the transaction is carried out electronically on screen based systems and which is supported by a time stamp contract note which indicates the client identity and the number allotted under the SEBI Act or the SCR Act or the Depositories Act and also gives the permanent account number of the client.

In either case whether the loss is treated as regular business loss or loss from speculative business the same cannot be set off against the income under the head salary due to an express prohibition in Section 71 in this regard.

Trading in shares may be treated as business income or as capital gains depending on various factors including the volume of transactions, whether the funds used are own funds or borrowed funds etc. If the transactions are treated as forming part of a business, the gain will be taxed at the normal rates of tax applicable to you.

You can, however, claim rebate in respect of the securities transaction tax paid by you under Section 88E.

The rebate that can be claimed by you will be the lower of the tax payable on the business income (computed at the average rate of income tax) or the securities transaction tax paid by you. If there is a loss from such business, the same cannot be set off against salary income but can be set off against income from any other source or head.

The balance if any can be carried forward and set off against business income within eight assessment years immediately succeeding the assessment year in which the loss was first computed.

If the income is treated as speculative income, it will be taxed at the normal rates of tax. If there is a loss, the same can be carried forward and set off against speculative income within four assessment years immediately succeeding the assessment year in which the loss was first computed.

If the transactions are of such nature as to be charged under the head capital gains, the gains will be taxed at 10 per cent (as increased by the appropriate surcharge and additional surcharge) if the gain is short term and will be exempt if the gain is long term provided securities transaction tax is paid at the time of sale.

On the other hand if no securities transaction tax is paid at the time of sale, the gain if short term will be charged at normal rates applicable to you while the gain if long term will be taxed at 20 per cent (as increased by the appropriate surcharge and additional surcharge).

You may also note that a short term capital loss can be set off either against short-term capital gain or long-term capital gain while a long-term capital loss can only be set off against long-term capital gains.

Both losses can be carried forward and set off in the same manner as already stated within a period of eight assessment years immediately succeeding the assessment year in which the loss was first computed.

You may further note that if the shares are sold through a recognised stock exchange and where securities transaction tax is paid at the time of sale, the loss if any will be ignored and can neither be set off nor carried forward in the current years or future years.

The tax on the gain from dealing in F&O and shares will have to be paid by way of advance tax in accordance with the provisions of Section 208.

Failure to do so will attract the levy of interest under Section 234C during the previous year and under Section 234B beyond the previous year.

I had purchased 25 shares of Subex System Ltd at Rs 630/- per share on September 12, 2005. I was allotted 25 bonus shares on February 2, 2006. I sold all the 50 shares on June 11, 2006 at Rs 465/- per share. Should I compute the capital gai ns in the aggregate for all the 50 shares or will I be required to calculate it separately for the original and bonus shares? — S. Saratha

The capital gains will not vary whether it is computed for the 50 shares together or separately for the original and bonus shares and hence it will not make any difference.

Mail your queries to

taxtalk@thehindu.co.in

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‘Tax Talk’, Business Line, Kasturi Buildings,

859, Anna Salai, Chennai-600002

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