Capital gains on transfer of securities in Demat form

Introduction

The Depositories Act, 1996 introduced the provisions of Dematerialization of securities to ensure faster settlement of trade. In the register of the issuing company, the depository appears as the registered owner of the Dematerialized securities. In the books of the depository, the investor appears as the beneficial owner.

When securities held in Demat form are transferred, the profit or gains arising on such transfer is taxable as the income of beneficial owner. It is not treated as the income of the depository. The period of holding and cost of acquisition of such securities shall be computed as per FIFO method.

1. About

A depository interacts with the investors through the participants who are its agents. To sale or purchase securities in Dematerialized form, the investors have to enter into an agreement and open a Demat account with a participant. Whenever any transfer of securities held in Demat form is made, the delivery is given or taken by adjusting the accounts maintained with the Depository by the two parties.

Where an investor opts to hold a security in Demat form (not in physical possession of certificate) the Depository shall be intimated of the details of allotment of securities and, accordingly, the depository shall enter in its records the name of the allottee as the beneficial owner of that security. Under this system, physical share certificates are surrendered to the issuing agency and the account maintained with the depository is the only evidence of the ownership of the securities. This conversion of physical certificates into the electronic holdings is called Dematerialization.

2. Scope of provision [Section 67(7)]

Though the Depository is regarded as the registered owner, but the investors are treated as beneficial owners. Therefore, any profit or gain arising on transfer of any security held in Dematerialized form is taxable as the income of investor, being a beneficial owner. It is not treated as the income of the depository in spite of the fact that it is a registered owner of the securities.

3. How to calculate capital gains?

The capital gains shall be computed in the following manner:

4. Factors for calculation of capital gains

Any profits or gains arising from transfer of capital assets, being securities held in Demat form, shall be chargeable to tax under the head capital gains in the tax year in which such transfer took place. For computation of capital gains in such case, the following factors are considered:

(a) Period of holding;

(b) Full value of consideration;

(c) Cost of acquisition;

(d) Cost of improvement;

(e) Expenditure incurred in connection with transfer;

(f) Adjustment for the capital gains taxed under Section 67(10);

(g) Exemptions allowed under Section 82 to 88.

4.1. Computation of period of holding and cost of acquisition

The Dept. has clarified

If 2,500 shares are sold from this account, then the cost of acquisition of first 2000 shares shall be calculated from 25-5-2026, whereas the balance 500 shares will be treated as having been acquired on November 1, 2005, at the relevant cost. This is the effect of the FIFO method.

4.2. Computation of full value of consideration

The full value of consideration received or receivable on transfer of securities held in a Dematerialized form shall be calculated with reference to the Broker's Note provided such transactions are followed up by delivery of shares and also the transfer deeds.

4.3. Computation of cost of improvement

The cost of improvement of the securities held in Demat form shall be computed as per general provisions.

4.4. Adjustment for the capital gain taxable under Section 67(10)

Where the amount is chargeable to tax as income of partnership firm under Section 67(10), the firm shall attribute such amount to the capital asset remaining with it, including capital assets forming part of block of asset. Such attribution is allowed, at the time of computation of capital gains from the transfer of such capital asset remaining with the partnership firm, by way of deduction under Section 72(5). The deduction under Section 72(5) is allowed if the following conditions are satisfied:

(a) There should be a reconstitution of the partnership firm;

(b) Capital asset or money or both should be given to the partner on such reconstitution;

(c) Capital gain is computed and taxed in the hands of the firm under Section 67(10); and

(d) The book value (or historical value or WDV) of at least one of the capital assets remaining with the firm after such reconstitution should be less than its fair market value. It may also include the self-generated asset.

The amount chargeable to tax under Section 67(10) shall relate to revaluation of any capital asset or valuation of self-generated asset or self-generated goodwill of firm if the revaluation is based on a valuation report obtained from a registered valuer defined under Rule 56.

4.5. Computation of exemptions

Certain exemptions can be claimed under Sections 82 to 88 from the capital gains arising from transfer of securities held in Demat form subject to fulfilment of certain conditions.

4.6. Year in which taxable

Any profit or gain arising from transfer of securities held in Demat form shall be taxable in the tax year in which transfer took place.

References

Circular No. 768, Dated June 24, 1998

This article is general information and not tax advice. Provisions change. Confirm your position with a qualified professional before acting.