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Capital Gains

Nivedhitha Srinivasan (Articled Assistant) (28 Points)

09 July 2010

Dear Friends,

Will the sale of shares purchased through reinvestment of dividends attract capital gains?

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10 Replies

CA Anshu Agarwal (B€ @LW@¥$ ]-[@Pp¥) (1832 Points)
Replied 09 July 2010

the provision of taxation on sale of shares are equivalent applicable whether these shares purchased through re-investment of dividends or otherwise,

so the sale of shares purchased through reinvestment of dividends attract capital gains, subject to exemption u/s 10(38).

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Satish (CA Final Student) (479 Points)
Replied 09 July 2010

Dividend recieved on shares is exempt from tax. After availing this exemption, assessee is free to invest the same wherever he / she wants. Investing in shares agains out of dividend is altogather different from the dividend exemption. If such shares are sold within a period of 12 months, Short term capital gain tax would be attracted. But if sale takes place after holding of 12 full months, Long term capital gain arises which is exempt.

DT Fundas - Tarun rustagi ( Author) (1150 Points)
Replied 09 July 2010

agree with above friends. it does not make a difference whether the reinvestment is made by dividend income or from any other source.friend satish explain it very right.

regards

tarun rustagi

Amir (Learner) (4016 Points)
Replied 09 July 2010

Dear Nivedhitha,

Just for my info, r u sure u r talking about SHARES??

I am asking this becos practically I have not heard of allotment of SHARES through dividend reinvestment....This may be a new thing to learn.....:)

Anyways, the case is common with Mutual Funds where dividend gets reinvested & investor is alloted additional/new units..

Now, sale of such units shall be chargeable as Capital Gains.

Period of holding shall be reckoned from the date of additional units.

COA shall be the amount of dividend re-invested.

Rest as usual but yes due consideration should be given to the provision of Sec 94(7) i:e Dividend stripping.

CA B Anand (CHARTERED ACCOUNTANT) (198 Points)
Replied 10 July 2010

i think it will attract capital gains, m not sure about the sections. reason wat i guess is, it is very similar to buying and selling of a house out of the agricultural proceeds. since agricultural income is also exempted under sec 10 (1).

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CA Anshu Agarwal (B€ @LW@¥$ ]-[@Pp¥) (1832 Points)
Replied 10 July 2010

Originally posted by : anand B
	i think it will attract capital gains, m not sure about the sections. reason wat i guess is, it is very similar to buying and selling of a house out of the agricultural proceeds. since agricultural income is also exempted under sec 10 (1).

the capital gain on shares is subject to exemption u/s 10(38), 54EC or 54F

CA B Anand (CHARTERED ACCOUNTANT) (198 Points)
Replied 10 July 2010

yes, i agree its subject to that exemptions......

C.Balaji (Learner) (1867 Points)
Replied 10 July 2010

Dear Friends...

I have a query in this topic....
Since No expense is allowed to adjust against Exempt Income... so any income generated from exempt income should be exempt only...
Dividend Income is exempt from tax... so any income generated with that exempt income should be exempt only.... Why it should be made taxable???

Please clarify me...

DT Fundas - Tarun rustagi ( Author) (1150 Points)
Replied 10 July 2010

dear bala ji

who said this,expenses incurred for income generated from exempt income is allowable.plz read ur post once again it is the expenses for exempt income whch is not allowed but allowable for inome generated from exempt income.in this case assesee can claim reinvestment money as cost of acquisition of shares.

regards

tarun rustagi

Satish (CA Final Student) (479 Points)
Replied 10 July 2010

Dear Balaji,

Dividend will be assessed as exempt income in the hands of assessee. In such assessment, no expense will be allowed as deduction relating to dividend being exempted income. First part is over. Now this dividend will be reinvested in shares. only investment does not amount to capital gains. when this investment is sold, it will be the time to assess the capital gain and there is no nexus between earlier exempted income with this fresh transaction. So where the question of exempted income or expense relating thereto is arised?