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Note on TDS on transfer of shares

A.     INTRODUCTION:

Tax Deducted at Source or TDS was introduced to collect tax from the source of income. According to the Income Tax Act, anyone making a payment is required to deduct tax if the payment is crossing certain limits. The limits or the rates are prescribed by the Income Tax department. TDS is managed by the Central Board of Direct Taxes (CBDT), which comes under the Department of Revenue.

The company or the person deducting the tax is called a deductor and the company or the person receiving the deducted payment if the deductee. The deductor is required to remit the tax into the account of the Union government and the deductee would be entitled to get credit of the amount taxed on the basis of Form 26AS.

TDS is deducted on various types of payments. It is deducted on salaries, interest payments by banks, commission payments, rent payments, consultation fees, and professional fees.

 

B.     TDS ON INCOME OF FOREIGN INSTITUTIONAL INVESTORS FROM SECURITIES [SECTION 196D] –

According to Section 196D, where any income in respect of securities referred to in clause (a) of Sub-section of Section 115AD** is payable to Foreign Institutional Investor, the person responsible for making the payment shall, at the time of credit of such income to the account of payee or at the time of payment thereof, whichever is earlier deduct income tax @ 20%.

Also, no deduction of tax shall be made from any income by way of capital gains arising from the transfer of securities referred to in section 115AD** payable to a Foreign Institutional Investor.

A new proviso is inserted to Section 196D which provides that in case of a payee to whom an agreement under Section 90(1) or Section 90A (1) applies and such payee has furnished the Tax Residency Certificate (TRC) referred to in Section 90(4) or Section 90A (4) of the Act, then the tax shall be deducted at the rate of 20% or the rate or rates of income tax provided in such agreement for such income, whichever is lower.

**Section 115AD: –

(1) Where the total income of a [specified fund or] Foreign Institutional Investor includes—

(a) income received in respect of securities (other than units referred to in section 115AB); or

(b) income by way of short-term or long-term capital gains arising from the transfer of such securities.

(2) Where the gross total income of the [specified fund or] Foreign Institutional Investor—

(a)  consists only of income in respect of securities referred to in clause (a) of sub-section (1), no deduction shall be allowed to it under sections 28 to 44C or clause (i) or clause (iii) of section 57 or under Chapter VI-A;

(b)  includes any income referred to in clause (a) or clause (b) of sub-section (1), the gross total income shall be reduced by the amount of such income and the deduction under Chapter VI-A shall be allowed as if the gross total income as so reduced, were the gross total income of the 25[specified fund or] Foreign Institutional Investor.

Explanation. —For the purposes of this section, —

(a)  the expression “Foreign Institutional Investor” means such investor as the Central Government may, by notification in the Official Gazette, specify in this behalf;

(b)  the expression “securities” shall have the meaning assigned to it in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956);

 

C.     TDS PROVISION OF NON- RESIDENTS CITIZENS OF INDIA

Section 195 of Income Tax Act, 1961:

This section focuses on tax deductions and tax rates that are involved in all business transactions of a non-resident citizen of India on a day-to-day basis. Any kind of income is chargeable under section 195 of Income Tax Act. The act establishes a measure to prevent a revenue loss due to a foreign resident’s tax burden by deducting the equivalent amount from payments given to them at source.

Payer is the person who is remitting the payment to a non-resident payee. The payer can be individuals, Hindu Undivided Family, firms, non-residents, foreign companies, persons having exempt income in India and any juristic person irrespective of whether that person has income chargeable to tax in India or not. Payee is a non-resident whose residential status is as per Section 6 of the Act.

The TDS rates given under the Finance Act 2022 are as follows:

 

Particulars

Rates

Income from the investment made by an NRI (Interest/Dividend)

20%

Long term capital gains arising from the transfer of the following assets as per Section 115E:

Shares of an Indian Company

Debentures and deposits of a Public Company in India

Securities issued by the government

10%

Long term capital gain from listed shares and securities referred to in Section 112A

10%

Any other long-term capital gain

20%

Short term capital gains under section 111A

15%

Interest payable by the Government or Indian concern on the money borrowed in foreign currency

20%

Royalty and Fees for technical services payable by the Government or an Indian concern

10%

Winnings from:

Card games, lotteries, crossword puzzles, and other games of any sort Horse races

30%

Any other income

30%

D.     TDS PROVISION FOR RESIDENT CITIZENS OF INDIA

According to Income Tax Act, 1961, there is no TDS provision for transfer of shares between resident citizens. However as a good Governance and to avoid further Tax litigation management may think to pay transfer amount post deduction of TDS and credit the same to 26AS of respective Assesses.