Tag: long term capital gains

Fresh tax notices to FPIs over capital gains, BFSI News, ET BFSI

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The I-T department has asked multiple foreign portfolio investors (FPIs) to cough up more taxes on their capital gains after denying set-off and tax treaty benefits, people aware of the development said. The notices were issued by the Centralised Processing Centre (CPC) of the I-T department under Section 143(1) of the Income-tax Act.

The intimation under Section 143(1) informs taxpayers about initial assessments carried out by the tax department and points out discrepancies in tax filings, and demands additional taxes, if any.

Intimations demanding additional taxes primarily cited three reasons, the sources said. Either the FPIs have been disallowed to set off long-term capital gains against short-term capital losses, or the tax department has not taken tax treaties into consideration, or, in some cases, it has categorised short-term capital losses incurred by FPIs as gains, they claimed.

Many tax experts suspect that this could just be a technical glitch in the system, but even so the FPIs will now have to approach either the Commissioner of Income Tax (Appeals) or litigate the matter.

“The law allows long-term capital gains to be set off against short-term capital losses,” said Rajesh H Gandhi, partner at Deloitte India. “If such set-offs are denied, it could result in significant tax demands for FPIs, requiring them to litigate the matter. Hopefully this is a technical glitch and would be rectified soon.”

In other cases, the tax department has not taken tax treaties into consideration while demanding tax from FPIs. All FPIs that are covered by India’s bilateral tax treaties and attract much lower taxes – of 10% to 15% – than if they are not protected through tax treaties.

In several other cases, the tax department has categorised short-term capital losses incurred by FPIs as gains, sources said. So, instead of getting deductions on such amounts, they have been asked to cough up taxes.

“Taxpayers have raised concerns with respect to the Centralised Processing Centre erroneously treating short-term capital loss as short-term capital gains and taxing the same,” said Sameer Gupta at EY India. “There have been other issues, too, around gains which were subject to tax at 50% of the domestic tax rate,” he said.

“The remedial measures adopted by taxpayers for the above include filing of rectification application and also parallelly seeking recourse through an appellate process,” Gupta said. ET could not independently verify whether the tax notices were a result of a technical glitch or change in stance or any other issue related to FPIs. An email query sent to the CBDT and the FM did not elicit any response as of press time Thursday.



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Tax Query: Setting off capital losses in delisted shares

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Kindly guide whether there is any method by which capital loss under Income Tax provisions can be set off against the shares which get delisted and are not traded, or have become unmarketable? Please also guide about the tax treatment on equity shares where capital reduction has been effected.

E Madhavan NairAs per the provisions of Section 71 of the Income-tax Act, 1961 (‘the Act’), losses under the head of capital gains can be set-off against income under the head of capital gains only. Further, as per the provisions of Section 70 of Act, Short-Term Capital Loss can be set-off against Long-Term or Short-Term Capital Gain. However, Long-Term Capital Loss can be set-off only against Long-Term Capital Gains. Holding period of capital asset determines the nature of Capital Assets viz. a Long-Term Capital Asset or a Short-Term Capital Asset. As per the provisions of the Act, assets in the nature of unlisted equity share would qualify as Long-Term Capital Asset, if at the time of selling, the same has been held for a period of 24 months or more. Otherwise, the same would qualify as Short-Term Capital Asset. In order to answer the query, additional facts and clarity would be required. However, in the instant case, if the subject Capital Loss is Short-Term in nature (to be ascertained based on the period of holding and nature of the asset), such loss can be set off against Short-Term / Long- Term Capital Gain arising from any other capital asset. However, if such loss is Long-Term in nature, the same can be set off against Long-Term Capital Gain arising from any other capital asset. In case of a Capital Reduction, if the shareholders receive any payout the tax treatment as per the provisions of the Act would be twofold as mentioned below:

Taxability as Dividend: As per the provisions of section 2(22)(d), distribution by company on capital reduction (to the extent attributable to its accumulated profits), shall be considered as deemed dividend. It is also important to note that as per the amendments made by Finance Act 2020, companies are no longer required to pay dividend distribution tax. Dividend income is taxable in the hands of the shareholder at applicable slab rates. The payor company would be required to deduct Taxes at Source (TDS) on such dividend under section 194 of the Act at 10 per cent, for dividends paid in cash. For dividends paid via any mode other than cash, TDS shall be required, if aggregate payment exceeds ₹5,000. Taxability as Capital Gain / Loss: Taxation for distribution of profits (over and above accumulated profits) has been a matter of debate. There are judicial precedents which suggest that such distributions shall be regarded as transfer and would result in Capital Gain / Loss in the hands of the shareholder.

The writer is a practising chartered accountant

Send your queries to taxtalk@thehindu.co.in

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Is tax-harvesting that good an idea?

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With the equity markets soaring to new highs, a new term is hogging limelight– tax harvesting. This is particularly for investors in equity mutual funds.

For the uninitiated, this refers to the attempts of equity mutual fund investors to harvest the exemption on long-term gains (up to ₹1 lakh), every financial year on their investments. This is done by selling their long-term equity investments till their aggregate gains total to ₹ 1 lakh (in a year), and subsequently repurchasing the investments at the same price (or NAV). Since the sale price now becomes your cost of acquisition, you can repeat this set of sale and repurchase transactions againafter a year (when these equity investments qualify for long- term capital gains). Doing this year after year lowers your overall tax liability, to an extent, when you finally sell the equity fund investments.

But the game is not worth the candle, considering that the savings every year are only limited to ₹10,000 (long-term capital gain at 10 per cent on ₹1 lakh). Besides, this seemingly good ideahas many practical hurdles. Let’s discuss some of them.

General caveats

Before discussing the technical hurdles faced, one must understand the rules of taxation clearly. The exemption of up to ₹1 lakh on long-term capital gains (LTCG) is only applicable on the aggregate LTCG on equity investments — listed stocks and/or equity-oriented mutual funds — in a financial year. The gains shall be taxed as long term only when such equity investments are held for more than 12 months. Besides, the Income Tax Act defines equity-oriented mutual funds as only those where at least 65 per cent of the fund’s proceeds are invested in equity shares of listed domestic companies. If it is a fund of funds (FoF), the underlying fund should invest at least 90 per cent of total proceeds in listed domestic companies for FoF to be classified as equity-oriented funds.

This clearly excludes funds that invest predominantly in international equities, debt securities and unlisted Indian equities etc. for whom rules of taxation differ.

Besides if you have made your investments through Systematic Investment Plans (SIP), then the cost of acquisition will be based on the units purchased initially– First-In First-Out method. Also, remember that 12 months should have lapsed since the purchase date of each instalment of the SIP for the capital gains to be taxed as long term. Else, you will have to end up paying tax at the rate of 15 per cent on your short term capital gains.

Penny-wise and pound-foolish

Tax-harvesting differs from plain profit-booking, in that the investor continues to stay invested in the fund in the former. To be able to stay invested, you would have to repurchase your equity mutual funds, preferably at the same NAV, so as to avoid any losses due to the difference in daily NAVs. For this, investors need to be mindful of many factors.

One, the investor should be mindful of the cut-off timings for the transactions. The cut-off timing for equity schemes is stipulated at 3 pm — certain third party websites (/ apps) and brokers can have a cut off time earlier than the one stipulated by fund houses. That is, subject to availability of funds, if both the transactions are executed within the cut-off time, the same day’s NAV shall apply for the sale and repurchase transaction. Any delay in fund transfer (to the AMC’s account) or other technical glitch can subject the investors to the volatility in the equity markets – that is a difference in NAV in the sale and repurchase transaction. Your purchase transaction can also get delayed due to the time lag between debit of funds from your bank account and credit to the AMC’s account– mostly prevelant in the case of transactions done using NACH mandate, NEFT and RTGS. The resultant change in NAV can disrupt your investments made for long term goals.

Two, since sale proceeds are not immediately credited to your account, you should be maintaining a fat balance in your bank account to be able to purchase the units at the same NAV. While SEBI stipulates a maximum of 10 days to credit the sale proceeds to your accounts, fund houses generally take up to three days. However, funds for the repurchase transaction must be credited to the fund house, before 3 pm on the same day, to avail the same NAV.

Three, do note that a few funds have ceased accepting lump sum purchases. For example, in September 2020, following the over-valuation in the small- cap space, SBI’s small cap fund, closed itself to lump sum investments after September 7, 2020. Further, on its SIP investments too the fund has a cap of up to ₹5,000 per month (per investor).

Four, be mindful of other incidental charges such as brokerage charges (applicable in the case of Exchange Traded Funds) on multiple transactions.

Five, the concept of tax harvesting assumes a market situation wherein gains on long-term equity funds are spread evenly over the years. But the equity markets do not always exhibit a linear growth. For instance, while the Sensex inched up by 11 and 17 per cent in FY18 and FY19, respectively, it crashed by 23 per cent in FY20. Thereafter in FY21 (thus far), the index rallied by 71 per cent. This volatility can end up distorting your tax harvesting plans.

Net-net, the process is too tedious for a maximum saving of ₹10,000 at the end of every financial year. Investors need to see if these marginal savings are worth the pain.

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