With the Bombay Stock Exchange altering its BSE 500 constituents...
Investors flocking to pick up second-rung stocks for the so-called dividend yield and capital gains could be in for a tax shock.
The Bombay Stock Exchange (BSE) has revised its broad-based index BSE-500, commonly known as B2 index.
The exchange has changed 94 stocks in the BSE-500 index with effect from May 26. But the new stocks will not be eligible for exemption from long term capital gains (LTCG) tax.
Among the stocks which have been included are Adlabs Films, Aptech Ltd, Allahabad Bank, Bank of Rajastha among others. The scrips excluded are AFT Industries, Birla Global Finance, Balaji Distilleries, Cinevistaas among others.
The Union Budget for fiscal year 2004 has allowed transaction in shares comprising the BSE-500 index and purchased after March 1, 2003, and sold after holding them for at least 12 months to claim exemption from payment of capital gains tax.
The BSE-500 index has been one of the top performing indices of late and the investors have been chasing these stocks to claim the benefit of capital gains tax exemption.
BSE officials said that companies in BSE-500 index as on March 1, 2003, would only be eligible for the exemption from LTCG and the new entrants would not be eligible for the benefit.
However, investors are confused as the Finance Bill does not clarify whether only those scrips that comprised the BSE-500 index as on March 1, 2003, will get the tax benefit or it will be applicable to new entrants too.
If the benefit is not extended to new entrants in the BSE-500 index, it will violate the spirit of the new legislation, tax experts said.
The revision in BSE-500 means that from now onwards instead of three classes of securities for the purpose of LTCG, four classes are created differentiating the tax rates says K P Ostwal, a leading tax practitioner.
First category includes scrips listed as on March 1, 2003, in BSE-500 which are totally exempt under Section 10(36); the second category will include the new entrants in BSE-500 which will not be eligible for the exemption from LTCG.
In addition, there are scrips listed on NSE or BSE or any other stock exchange but not in BSE-500 where the rate of tax will be 10 per cent plus surcharge (before indexation) or 20 per cent (after indexation).
The last category will be unlisted securities which will continue to attract 20 per cent tax.
This is in view of the fact that though the proposed exemption under Section 10 (36) of Income Tax has been amended but the charging section 112 has not been amended.
So far the government had differentiated between listed securities and unlisted securities as far as levy of LTCG tax is concerned.
The special rate of tax is 10 per cent plus surcharge in case of listed securities (defined in Section 2 of the Securities Contracts Regulation Act, 1956 & listed in a recognised stock exchange in India) whereas the same was 20 per cent in case of unlisted securities under section 112 of the Income Tax Act 1961.
The changes
