How Budget 2024 proposals will impact your equity market investments

The Finance Minister has proposed drastic changes in the sphere of capital gains. In this article we will discuss Budget 2024 proposals relating to taxation of equity market transactions.

Increase in the tax rate and enhanced tax-free amount of long term capital gains

Presently the profits on sale of listed shares and units of equity-oriented schemes of mutual funds held for twelve months or less are treated as short term capital gains and are taxed at flat 15% under Section 111A if Securities Transaction Tax (STT) has been paid on the same. If the same are held for more than twelve months, the profits are treated as long term capital gains and taxed at a flat rate of 10% beyond the initial one lakh, which are taxed at zero rate and thus come tax-free in your hands under Section 112A without any benefit for indexation.

The finance minister has retained the holding period requirement for the listed shares and equity oriented scheme’s units for becoming long term capital asset but has proposed increase in the tax rates both for long term capital gains and short term capital gains on these assets. She has proposed that the short term capital gains on these investments will be increased from 15% to 20% and the rate of tax on long term capital gains shall be enhanced from the present 10% to 12.50%.

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Moreover, the finance minister has also proposed to increase the initial amount of long term capital gains from one lakh rupees to one lakh twenty-five thousand rupees, on which no tax is payable.

Please note that the grandfathering provisions introduced in the budget of 2018 will continue. The grandfathering provisions provide that in case the listed shares or units of equity oriented schemes were acquired prior to 1^st February 2018, the closing price in case of shares and Net Asset Value in case of units of equity oriented schemes on 31^st January 2018 could be taken as your cost of acquisition for computation of capital gains.

Increase in rates of Securities Transactions Tax

The Finance Minister has also proposed increase in the rates of STT payable on derivative transaction in equity popularly called FNO. For an an option in securities the STT rate has been hiked from 0.0625% to 0.1% of the option premium which is same as is being levied on transactions of actual delivery. In respect of futures in securities the STT is proposed to be hiked from 0.0125% to 0.02% of the price at which such futures are traded.

Changes in taxation of buyback of shares

Drastic changes have been proposed for taxation of money received from companies on buyback of shares. Presently money received on buyback of shares is exempt in the hands of the shareholder under Section 10(34A) but the company has to pay tax at flat rate of 20%+12% surcharge and 4% cess in respect of amount of buyback paid as reduced by the amount of money including premium if any received by the Company. The effective rate on buyback presently comes to 23.296%. So though the shareholder does not pay anything from his pocket but indirectly he incurs a cost of 23.296% for the buyback effected by the company irrespective of his slab rate. This rate is significantly higher than presently levied on even on short term capital gains on listed shares.

The finance minister has proposed to do away with the present scheme of taxation of buyback of shares. She has proposed that the companies are no longer required to pay any tax in respect of buyback of shares but instead the amount received against buyback of shares shall be treated as dividend in the hands of the shareholder and taxed at the slab rate applicable to individual shareholder. Moreover, since this amount is being treated as dividends the cost of acquisition of these shares is not allowed to be claimed against the buyback amount received. You are not allowed to claim any expenditure against the amount of buy back treated as dividend as per the proposal.

This will adversely affect the promoter shareholders who are in higher tax slabs and will have to shell out significantly more money as tax than what was being paid by the company.

Though no deduction is allowed against the buyback amount treated as dividend but as the buyback of shares results into extinguishment of the shares, the shareholder will be able to claim the cost of acquisition as loss on extinguishment of such shares as short term or long term capital loss depending on his holding period. Such loss can be set off against the eligible capital gains during the year and unabsorbed loss would be carried forward for set off in subsequent years.

The proposed tax regime will adversely affect the cash flow of small shareholders who will have to shell out tax on the full amount received on buy back whereas the benefit in respect of deemed loss on extinguishment of such shares may or may not be available for set off depending on availability of taxable and eligible capital gains. The proposed provisions will apply in respect of buy back taking place on and after 1^st October 2024. I feel this will result into lower number of buybacks post implementation of the proposed tax regime.

(The author is a tax and investment expert, and can be reached at jainbalwant@gmail.com)

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