Learner
3134 Points
Joined September 2009
The Tax Incidence Points
The terms explain the tax treatment of financial tools at different time periods. The different points at which can tax may be payable are:
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At the time of the investment / transaction
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During the tenure of the investment when cash flows occur
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At the time of maturity /sale of the investment
Different financial tools will have different times during which tax may be payable.
Example
Let us see how transactions related to shares are taxed.
At the time of purchase of the shares, Securities Transaction Tax(STT) has to be paid. STT has to be paid by both the buyer and seller of the shares. It should be noted that the amount to be invested should have already suffered Income Tax in the hands of the investor.
When the company that we have invested in gives dividends, Dividend Distribution Tax (DDT) has to be paid. DDT is paid by the company directly and thus is a form of Tax Deducted at Source.
Finally when the share is sold, there will be Capital Gains Tax. Capital gains for shares can be Short Term (if the share is help for less than a year – 365 days) taxed at 10%; or Long Term (greater an 1 year holding period) which is tax free.
Thus investment in shares is a case of TTE (Tax – Tax – Exempt).