Introduction
Section 10(35) of the Income Tax Act, 1961 provides exemption to certain income earned by a specified entity. In this blog post, we will discuss the various aspects of this section.
What is Section 10(35)?
Section 10(35) of the Income Tax Act, 1961 provides an exemption to income earned by a specified entity, which is a securities transaction tax (STT) paid by the seller of equity shares, equity-oriented mutual funds, or units of business trusts.
Specified Entity
The specified entity refers to a recognized stock exchange in India, a registered stockbroker, or a clearing corporation recognized by the Securities and Exchange Board of India (SEBI).
Income covered under Section 10(35)
The income that is covered under Section 10(35) is the income earned by the specified entity, i.e., recognized stock exchange, registered stockbroker, or clearing corporation, by way of securities transaction tax (STT) paid by the seller of equity shares, equity-oriented mutual funds, or units of business trusts.
Exemption
The income earned by the specified entity, i.e., recognized stock exchange, registered stockbroker, or clearing corporation, by way of securities transaction tax (STT) paid by the seller of equity shares, equity-oriented mutual funds, or units of business trusts is exempt under Section 10(35) of the Income Tax Act.
Conditions for availing exemption
To avail of the exemption under Section 10(35), the following conditions need to be fulfilled:
- The income should be earned by a specified entity, i.e., recognized stock exchange, registered stockbroker, or clearing corporation.
- The income should be in the form of securities transaction tax (STT) paid by the seller of equity shares, equity-oriented mutual funds, or units of business trusts.
- The income should be earned during the course of business.
Applicability of Section 10(35)
Section 10(35) of the Income Tax Act, 1961 is applicable to all recognized stock exchanges, registered stockbrokers, and clearing corporations recognized by SEBI. This section applies only to income earned in the course of business and not to income earned from any other sources.
Purpose of Section 10(35)
The purpose of Section 10(35) is to encourage investment in the stock market and mutual funds by providing tax benefits to investors. The exemption of income earned by specified entities from STT paid by the seller helps in reducing the cost of transactions in the stock market, thus making it more attractive to investors.
Calculation of Securities
Transaction Tax (STT) Securities Transaction Tax (STT) is calculated as a percentage of the transaction value of the securities sold by the seller. The rate of STT varies depending on the type of security sold and the value of the transaction. As per the Finance Act, 2021, the STT rates are as follows:
- Equity Shares – 0.1% on the transaction value
- Equity-Oriented Mutual Funds – 0.001% on the transaction value
- Units of Business Trusts – 0.001% on the transaction value
Benefits of Section 10(35)
The benefits of Section 10(35) are as follows:
- Exemption of income earned by specified entities from STT paid by the seller helps in reducing the cost of transactions in the stock market, thus making it more attractive to investors.
- Encourages investment in the stock market and mutual funds by providing tax benefits to investors.
- It helps in promoting transparency in the financial market as the payment of STT ensures that the transaction is recorded and reported to the government.
Impact of Section 10(35) on Tax Liability
The exemption provided under Section 10(35) of the Income Tax Act has a significant impact on the tax liability of investors who trade in the stock market or invest in mutual funds. Since the STT paid by the seller is exempt from tax, investors need not worry about including it in their taxable income.
For example, if an investor sells equity shares worth Rs. 1,00,000 and pays an STT of Rs. 100, the taxable income will be Rs. 1,00,000 only, and the STT of Rs. 100 need not be included in the taxable income. This results in a reduction in the tax liability of the investor.
Similarly, in the case of mutual funds and business trusts, the STT paid by the seller is exempt under Section 10(35), resulting in a lower tax liability for investors.
Impact of Section 10(35) on the Stock Market
The exemption provided under Section 10(35) of the Income Tax Act has a positive impact on the stock market. It helps in reducing the cost of transactions and making the stock market more attractive to investors. This, in turn, leads to an increase in liquidity in the stock market, which is beneficial for all stakeholders.
Moreover, the exemption of STT paid by the seller helps in promoting transparency in the stock market. It ensures that all transactions are recorded and reported to the government, thus preventing tax evasion and illegal activities.
Conclusion
In conclusion, Section 10(35) of the Income Tax Act provides an exemption to income earned by a specified entity in the form of securities transaction tax (STT) paid by the seller of equity shares, equity-oriented mutual funds, or units of business trusts. However, certain conditions need to be fulfilled to avail of this exemption. It is advisable to consult a tax expert to ensure compliance with all the necessary regulations.
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Frequently Asked Questions (FAQs)
- What is Section 10(35) of the Income Tax Act?
Section 10(35) provides an exemption to income earned by specified entities in the form of securities transaction tax (STT) paid by the seller of equity shares, equity-oriented mutual funds, or units of business trusts.
2. Who can avail of the benefits of Section 10(35)?
The benefits of Section 10(35) can be availed by recognized stock exchanges, registered stockbrokers, and clearing corporations recognized by SEBI.
3. What is Securities Transaction Tax (STT)?
Securities Transaction Tax (STT) is a tax levied on the transaction value of securities such as equity shares, equity-oriented mutual funds, and units of business trusts.
4. How is STT calculated?
STT is calculated as a percentage of the transaction value of the securities sold by the seller. The rate of STT varies depending on the type of security sold and the value of the transaction.
5. What is the purpose of Section 10(35)?
The purpose of Section 10(35) is to encourage investment in the stock market and mutual funds by providing tax benefits to investors.
6. How does Section 10(35) impact tax liability?
The exemption provided under Section 10(35) has a significant impact on the tax liability of investors who trade in the stock market or invest in mutual funds. Since the STT paid by the seller is exempt from tax, investors need not worry about including it in their taxable income.
7. Is there a limit on the amount of STT that is exempt under Section 10(35)?
No, there is no limit on the amount of STT that is exempt under Section 10(35).
8. What is the impact of Section 10(35) on the stock market?
The exemption provided under Section 10(35) has a positive impact on the stock market. It helps in reducing the cost of transactions and making the stock market more attractive to investors. This, in turn, leads to an increase in liquidity in the stock market, which is beneficial for all stakeholders.
9. Can the benefits of Section 10(35) be availed by non-resident investors?
Yes, non-resident investors can also avail of the benefits of Section 10(35) if they trade in the Indian stock market or invest in Indian mutual funds.
10. Do investors need to file a separate tax return to claim the benefits of Section 10(35)?
No, investors need not file a separate tax return to claim the benefits of Section 10(35). The exemption of STT paid by the seller is automatically factored in while calculating the taxable income of the investor.
