What is short selling of Securities?
Short Selling of securities is a process of Lending and Borrowing of Securities as defined in Rule13P(h) of Income Tax Rules, 2002
- An investor borrows securities from another person for a specified period under an outright purchase and re-sale contract.
- Investor sells the borrowed security in the market
- And on or before contract completion date repurchases it to return to the lender.
- The borrowing investor pays financial charges for the period of use of security.
Tax Treatment of the above Transaction
On the Borrower Side:
- In accordance with rule 13L(1)(b), The net difference in the hands of the borrower resulting in completing the whole transaction, including the financial charges and notional expense, is to be treated as capital gain or loss.
In case of a market-based transaction of any security, a notional expense @ 0.5% of sale proceed and 0.5% of cost of security shall be taken in lieu of brokerage, commission, transaction fee, levy, Laga or any other similar incidental expense – Rule 13N(8). However, this notional deduction is not applicable in case of:
- units of open-ended mutual funds; and
- Future contracts entered into by members of PMEX.
On Lender Side:
The income of the lender, being mark-up income will be taxed as Section 151 of ITO, 2001 (FTR except companies), and shall not be subject to capital gain.
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