Are there any ups and downs in your lives? Clearly, the answer is a resounding YES. This is because gyrations are part of our daily life. Be it your income, expenses, savings, health, mood, popularity of political parties…well, this list would be almost endless, because that is the nature of life. And just have a look around you. Are there any straight lines in nature? Absolutely none! Perfect straight lines were created by man for his own convenience and to provide a false sense of certainty.

When ups and downs are such an integral part of our life, how can investments be any different? Yes, they too experience the ups and downs, but to varying degrees. These patterns of ups and downs are spread over different time periods for various investment assets. These movement patterns are typically referred to as cycles.

Volatility, in most cases does not mean a permanent loss of capital. It is only a temporary deviation from the long range averages.

As an investor, you would do well to realise that volatility cannot be wished away but can be managed wisely and even profitably in many cases. Staying away from investing because of volatility is like avoiding life due to its ups and downs. Volatility could be caused by economic, political, geo-political and natural factors in different investments at different time periods. As an investor, you would do well to analyse and understand the real reasons that cause volatility and act accordingly.

Current reasons for volatility in equity markets

The present bout of volatility is caused predominantly by:

Fed tapering

The American Federal Reserve recently indicated it would slowly start reducing the liquidity flood. The local and global financial markets know well that such oceans of cheap liquidity are a temporary phenomenon and that the extraordinary measures taken in the aftermath of the sub-prime crisis would have to revert to the originally prudent levels. But the panic reaction of some foreign investors to the mere talk of such reversal sent the equity market into a tizzy. Once the realisation came that the announcement was in fact stating the obvious, some semblance of calm descended on the market.

Political atmosphere

The looming general elections in early 2014 have set the market participants factoring in the political atmosphere in their investment decisions. Market participants, experiencing a sense of despair over the current political and governance scenario, do seem to look forward to a particular political combination to capture power. If not, they would like to at least see a stable political formation at the Centre so that the stalled reform process may move forward.

High credit-deposit ratio of banks

Due to persistently high inflation in our country, bank deposits became quite unattractive to investors (due to the negative real returns they offer) and hence funds became scarce for banks. The RBI too tweaked certain lending facilities to minimise currency volatility. All these caused interest rates to spike, causing volatility.

Tackling volatility

Having understood that volatility is a fact of investment, you need to look for ways of managing it or benefiting from it. There are funds that adjust the equity exposure based on equity valuations. If they appear expensive, the equity exposure reduces and vice-versa. There are funds that activate a trigger when a certain condition is reached. You also have some funds deploying the derivatives strategy to benefit from volatility. And then, there are funds that thrive on volatility by taking advantage of arbitrage opportunities. The options are many.

Conclusion

Confused about taxation of income in respect of shares, be it capital gains or dividends received? There are various aspects of taxation of shares. First let us understand the law relating to computation of capital gains on shares and the rates of tax thereon…

Holding period requirement — long-term and short-term

Generally profits earned on sale of capital assets are treated as long-term if the assets sold were held for 36 months or more. However, in case of shares, the holding period requirement is only 12 months or more to make such profits as long-term. This requirement of lower holding period applies to shares in any company be it Indian or not or even public or private.

Tax rate in case of capital gains arising on sale of equity shares

At present, any long-term capital gains on equity shares listed on Indian stock exchange and sold through a stock broker are fully exempt from tax. However, this exemption is not available if the listed shares are sold outside the stock exchange platform or are tendered under any buyback scheme or under any open offer. This exemption for long-term capital gains is not available in case the shares are sold on any stock exchanges outside India. This exemption is available for equity shares of any company whether Indian or foreign listed on Indian stock exchange.

In case equity shares sold on Indian stock exchanges are held for less than 12 months, the profits will be taxed at a flat rate of 15.45%. In case your other income, excluding this short-term capital gains, is less than the basic exemption limit, you will be entitled to take the benefit of such shortfall in the basic exemption limit while calculating your tax liability.

Tax on capital gains arising on sale of shares other than listed

So the transaction not taking place on the platform of Indian stock exchange like that of unlisted shares or open offer or buyback of listed shares directly by the company are taxed differently. Profits made on such shares will still be treated as long-term if the shares have been held for 12 months or more. In case the shares are sold within 12 months, the short-term capital gains arising on such transaction shall be included in your regular income and shall be taxed at the slab rate applicable to you. Generally the indexed long-term capital gains are taxed at 20.60% but in case of listed shares if the long-term indexed capital gains on transactions outside stock exchange platform is higher than 10.30% of un-indexed capital gains, your liability on such long-term capital gains shall be restricted to 10.30% in such cases. So in case you had tendered shares of Hindustan Uniliver under buyback scheme, your liability would be restricted to 10.30% of profit made by you in case the shares were held for 12 months or more.

In case the shares are not listed in India, this option of choosing between 10.30% un-indexed and 20.60% indexed capital gains is not available.

In case your other income, excluding these long-term capital gains, is less than basic exemption limit, you will be entitled to take the benefit of such shortfall in the basic exemption limit.

Taxation of dividends received on shares

Any dividend received on shares held in Indian company is fully exempt in the hands of shareholder. However, the company is required to pay a tax called Dividend Distribution Tax on such dividend at the rate of 15.45%. So effectively 15.45% tax on your behalf has been paid by the company on the dividends received by you.