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Sold listed shares in physical form in FY 2018-19? You might end up paying higher taxes
April, 11th 2019

If you sold listed shares in physical form during FY2018-19 in order to beat the SEBI deadline of March 31 for transfer of physical shares, then you may have to pay higher tax on any capital gains from these shares as compared to what you would have paid if you had dematerialised them and then sold them.

The Securities Exchange Board of India (SEBI) issued a notification dated June 8, 2018 which said that transfer of equity shares will not be permitted in physical form after December 5, 2018. This deadline was further extended to March 31, 2019 to give investors more time to dematerialsie their physical shareholdings. The move was aimed at reducing fraudulent transactions.

The new rule does not prohibit an investor from merely holding shares in physical form. However, investors will not be able to transfer such shares unless they are dematerialised. This restriction shall not be applicable in case of transfer of title by way of inheritance or succession and transposition by interchanging the order of the name of the shareholders.

Given the March 31 deadline, many investors would have sold equity shares in physical format before this in the previous fiscal, i.e., in FY 2018-19. The question now arises as to how the capital gains on such shares will be taxed.

So, let us compare the taxation of capital gains on shares sold in physical format with that of shares sold in demat form.

Sale of listed securities in physical form
The gains arising from the sale of listed securities in physical form have to be first classified as either long-term capital gains (LTCG; if held for more than one year) or short-term capital gains (STCG; if held for less than one year).

According to current income tax laws, if the listed shares are sold in the physical format or transferred via off-market transactions (i.e., not via stock exchange), then the LTCG will be taxed at 20 per cent with cost inflation index and 10 per cent without cost inflation index.

STCG, in case of transfer of physical share certificates, will be taxed at normal slab rates. This means that these gains could be taxed at a rate of 30 per cent if your income exceeds Rs 10 lakh.

Sale of listed securities in demat form
Unlike physical certificates, which can be specifically identified at the time of buying or selling, shares held in dematerialised form have no specific identity and are part of a common pool.

As transfer of securities held in dematerialised form is effected only through book entries, it is not possible to link the purchase of a security with its sale by means of its distinctive number. Thus, for the purposes of calculating the date of transfer and period of holding in respect of shares held in demat form, the FIFO (First-in First out) method has to be applied. It implies that the security that first entered into the demat account is deemed to be sold first. Even if FIFO method is applied, the period of holding of physical shares for taxation purposes, which are subsequently converted into demat form, shall be determined with reference to the actual date of purchase and not the date on which the shares were dematerialised.

It has further been clarified by the CBDT that FIFO method shall apply only in case of securities held in demat form. FIFO method cannot be applied in case of securities held in physical form. Further, if in an existing account of demat stock, old physical stock is dematerialised and entered at a later date, under the FIFO method, the basis for determining the movement out of the account shall be the date of entry into the account. If the shareholder owns more than one demat account in his name, then FIFO method shall apply for each account separately.

If in an existing account of demat stock, old physical stock is dematerialised and entered at a later date, under the FIFO method, the basis for determining the movement out of the account is the date of entry into the account.

If 2,500 shares are sold from this account, then the cost of acquisition of first 2,000 shares shall be calculated from May 25, 2019, 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.

The LTCG in such cases will be chargeable to tax at the rate of 10 per cent provided securities transaction tax (STT) is paid at the time of acquisition and transfer of such shares. The tax will be charged only on that amount of capital gain which exceeds Rs 1 lakh in a single financial year. In any other case, the LTCG will be taxed at 20 per cent with cost inflation index and 10 per cent without cost inflation index.

On the other hand, STCG will charged at the tax rate of 15 per cent if STT is paid at the time of transfer of shares, otherwise it will be charged to tax as per normal slab rate.

If shares are not listed on any stock exchange, then such shares are called unlisted securities. The LTCG arising from transfer of unlisted shares, whether in demat form or physical form, after holding them for a period of more than 24 months, shall be chargeable to tax at the rate of 20 per cent with indexation.

However, the tax rate is 10 per cent in case of non-residents but the benefit of indexation and option to adjust the foreign currency fluctuation is not available in such case. In case short-term capital gain is arising from transfer of unlisted shares, whether in physical form or demat form, it is charged to tax as per normal slab rate.

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