Today in this article we will talk in detail about Income Tax in Stock Market. In the stock market, you can invest in equity shares, ETFs, mutual funds, options, etc. on the stock exchange. But very few people know that you have to pay income tax on whatever money you earn from the market.
When it comes to making money in the stock market, you make money in 2 ways:
- First dividend and
- Second short-term or long-term capital gains
Now how is this profit taxed and where you can avoid paying tax on your profits, for this, you should be aware of income tax slabs.
Table of Contents
When Imposed Income tax in Stock Market?
Different tax is applied on different slabs on investment in India – 0%, 5%, 10%, 15%, 20%, 25%, and 30%, further, you will know in which slab the amount earned from your stock market and how much tax will you have to pay for that.
Many people do trade in the stock market, but very few people know that if you sell shares after buying, then you have to pay tax on it. This tax is in the form of separate charges. Right now we talk about all the taxes imposed on the stock market.
How is equity taxed?
Whenever you invest in the shares of a company, and you get profit from that company, then you have to pay tax on that profit, whether it is a profit of capital gains or dividends received from the company.
If we talk about equity instruments, then it includes Equity Shares and Equity Oriented Mutual Funds.
Capital gains are divided into two parts:
Short Term Capital Gains (STCG)
If an investor invests in any of the shares listed on the stock exchange and sells those shares before one year, now if that investor has made a profit on his investment, then short-term capital gains (STCG) will be applicable to that profit.
On the other hand, if the investor incurs a loss, he is liable for Short Term Capital Loss (STCL).
Short Term Capital Gains = Sell Price – Expenses on Sale – Purchase Price
To understand this, let’s take an example, let’s say you bought 100 shares of a company for Rs 20,000, and after 4 months sold those shares for Rs 25,000.
Assuming you incur a cost of 1000 (brokerage, GST, STT, etc.) in the buying and selling of shares, here is the total capital gain:
=25000 – 20000 – 1000
Short-term capital gains are taxed at 15% as per section 11A of the Income Tax Act, 1961. This Income Tax Act comes under the IT Act.
So if 15% of your earned amount is withdrawn then it is Rs 600.
This is how you can calculate tax on your profits.
Long Term Capital Gains (LTCG)
If an investor invests in any of the shares listed on the stock exchange and sells those shares after one year and earns profit from there, then long-term capital gains (LTCG) are charged on that investor’s profit.
On the other hand, if the investor incurs a loss on selling his shares, then he is charged Long Term Capital Loss (LTCL).
If you invest for a long period, then you are given a rebate on the profit of up to Rs 1 lakh. Along with this, if you invest in a stock and you make a profit of more than one lakh rupees from that stock, then you will have to pay 10% tax on the profit as per the rules of the Government of India.
Before Budget 2018, whenever you sold your equity shares or Equity Oriented Mutual Fund after one year, it was subject to Long Term Capital Gains (LTCG). That is, there is a tax on the sale of shares.
A new provision was introduced on 1 February 2018 regarding the tax, which is called the ‘Grandfathering Rule’. Any Long Term Capital Gains from Equity Instruments, which are purchased before 31st January 2018 will be taxed as per the ‘Grandfathering Rule’.
As per the Grandfathering Rules, LTCGs made till January 31 will not be affected. It will be applicable only to profits made after that date.
For example, Raj bought a share of any company listed on the stock exchange on 30 September 2020, whose price was 100 at that time, and on 31 January 2022 the price of that share would have become Rs 160 and now Raj sells that share for Rs 200. At present, Raj’s sold shares attract a Long Term Capital Gains (LTCG) of Rs 40 (ie 200 – 160), while his actual profit is Rs 100.
Concept of Capital Gain and Capital Loss
Purchase Price < Sell Price = Capital Gain
Purchase Price > Sell Price = Capital Loss
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Income tax on loss from equity shares
Tax is imposed on profit but if you have a loss on trading or investing then how is the tax calculated there?
Now, just as there is short-term and long-term capital gain on the basis of a trading period, similarly short-term and long-term capital loss is also different.
Short-Term Capital Loss
Any loss, whether the short-term loss or long-term loss, arising out of the sale of equity shares, is offset against the same. If the loss is not fully adjusted, it is carried forward for eight years.
This can be adjusted against any short-term or long-term capital gain during these eight years.
It is important for an investor to understand that you can carry forward your loss only if you file the income tax return before the last date. So even if your income earned in a year is less than tax income, you are still required to file an income tax return to carry forward your loss.
Long-Term Capital Loss
Before the 2018 Budget, long-term capital loss from equity shares was considered dead loss – it could neither be adjusted nor carried forward.
After the 2018 Budget, if the investor incurs a loss, that loss will be carried forward.
Securities transaction tax (STT)
STT is levied on all equity shares bought and sold on the stock exchange. STT comes under Indian Act 111A and 112A.
However, if for any reason STT does not come under the transaction, short-term gains will be taxed as per the applicable slab to the investors, while long-term gains will be taxed at 10% to 20% as per section 112 of the IT Act.
How is dividends taxed?
If you invest in a company listed on the stock exchange, then the company gives dividends to its shareholders from its profit, it completely depends on the company whether that company wants to give dividends to its shareholders or not.
There are many such companies on the stock exchange that give dividends every year to their shareholders, while there are many other companies that use that profit for the expansion of the company, without giving dividends to the shareholders.
You also have to pay tax on the dividend paid by a company to its shareholders.
This tax is based on the income tax slab on your earned profit. 10% of the tax you pay on dividends in the entire financial year is credited to TDS Benefit.
How are Debt Securities Taxed?
Debt instruments are fixed-income wedged securities such as government securities, debentures, corporate bonds, and debt-oriented mutual funds.
In the case of listed security instruments like debentures, and corporate bonds, the classification holding period of short-term and long-term capital is 12 months.
If the investment in debt instruments is for less than 12 months then it will be considered a short-term capital gain and if the investment is held for more than 12 months then it comes under long-term gain.
Short-term capital gain on debt instruments is levied as per Income Tax Slavic whereas long-term capital gain comes under section 112 of IT. This tax can be 20% or 10%, in this, you can choose which is more beneficial for you.
However, the benefit of indexation is not available in the case of bonds issued by the Government or all debentures or bonds except Sovereign Gold Bonds issued by the Reserve Bank of India under the Sovereign Gold Bond Scheme, 2015 or Zero Coupon Bonds.
Profit earned by an investor from Sovereign Gold Bonds, issued by the Reserve Bank of India, is exempted from capital gains tax under section 47 (viic) of the IT Act, i.e. only when such bonds are sold.
However, these are covered under capital gains arising from transfers on stock exchanges.
How are derivatives taxed?
Derivative instruments are instruments whose value is derived from one or more underlying assets.
Those underlying assets can be commodities, currencies, metals, and even bonds. The derivative is completely dependent on its underlying asset. If the price of that asset increases, only then the price of the derivative will increase.
As per section 43(5) of IT, the profits made from derivatives trading will also be taxed as slaves on your profits. It has already been told about the Slavs at what rate tax is levied.
Investors do not have much knowledge about share market income tax, so we have covered every single aspect related to share market income tax. Now whenever you invest, be aware of income tax, so that the profit earned on your investment does not have much effect.
Investing in the stock market provides you an amazing opportunity to earn money but your net profit can be known only after paying share market expenses and taxes, so it is necessary that you get information about all these expenses and taxes and then invest accordingly.
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