[Opinion] Tax on Gains on Transfer of Equity Shares & Mutual Funds for Individual

CA Pawan Singh – [2023] 148 taxmann.com 279 (Article)

Prologue

In recent time shares and mutual funds have garnered much attention due to lucrative return on investment and are currently considered the most popular investment instruments in the financial market over conventional mode of investment such as Bank FD’s. Investing in shares means that you are investing directly in equity markets, while Mutual Fund investments mean a professional fund manager is investing for you in either equity funds or debt funds.

As both the instruments attract taxes on gain, it is prudent to understand the tax implications to know the net return on such investment post taxes

Tax Implication as per Income Tax Act, 1961 (Act)

Any gain/profit on transfer of Equity Shares or redemption of mutual fund units are subject to tax under the head “Capital Gain”

As per Section 45 of Act

45. (1) Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 54, 54B, 54D, 54E, 54EA, 54EB, 54F, 54G and 54H, be chargeable to income-tax under the head “Capital gains”, and shall be deemed to be the income of the previous year in which the transfer took place.

As per above charging section two important conditions needs to be satisfied for taxability under capital gain

• There should be a “capital asset”
• The capital assets is “transferred”

Let us understand what is capital assets and would shares & mutual fund satisfy the condition of capital assets

“Capital asset” as define u/s 2(14) of Act means—

(a) Property of any kind held by an assesse, whether or not connected with his business or profession;
……. [Extract Sec. 2(14)]

As per Hon’ble SC in case of Ahmed G.H. Ariff v. CWT [1970] 76 ITR 471 (SC) it was held that the term ‘Property’ is a term of the widest import and, subject to any limitation which the context may require, it signifies every possible interest which a person can clearly hold or enjoy.

The above signifies that property of any kind held by assessee (except the exception as given u/s 2(14)) is a capital assets for the purpose of Act, since shares & mutual funds are not covered under the exception list they qualify as capital assets for the purpose of Capital gains taxability.

Now let us understand what does transfer means

“Transfer”, in relation to a capital asset is defined u/s 2(47) of Act, which includes,—

i. the sale, exchange or relinquishment of the asset; or
ii. the extinguishment of any rights therein ; or

……..[Extract Sec. 2(47)]

Thus, taxability in case of Shares or Mutual fund will only arise in case there is a sale, exchange, relinquishment or extinguishment of any rights of such instruments.

Sale in general parlance mean a mutual agreement between two parties’ seller & buyer for transfer of absolute or general property for money.

Exchange As per Hon’ble SC in case of CIT v. Rasiklal Maeklal (HUF) [1989] 43 Taxman 259/177 ITR 198 (SC) it has been held that to qualify any transaction as exchange there must be a mutual transfer of ownership of one thing for the ownership of another.

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