The stock market is one investment avenue that can be very rewarding with capital appreciation and wealth creation as some of its hallmarks. However, on the other side of the balance scale, one has to be aware of the tax implications of the stock market earnings. In India, the profit made in the stock market comes with laws that cover the taxing of the said money under short-term capital gain and long-term capital gain and other sources like dividends.
Well, these decisions, of course, would depend on an investor’s perception of the tax structure. So, in this blog post, we will outline the most important features of taxation on stock market earnings in India, that is, capital gains tax and dividend tax and how they impact both retail investors and traders.
1. Taxation of Capital Gains: Short Term vs Long Term
The most common tax charged on income from the stock market is capital gains tax. Capital gains tax is the tax to be paid when there is the sale of a capital asset, such as stocks, with profit. The rate to be applied will depend on the length of time the investor holds the asset before selling. This is bifurcated into two types:
Short-Term Capital Gains (STCG)
Any profit realized from the sale of share or securities held for less than 12 months attracts short-term capital gains tax. Where listed stocks are sold within a year of their purchase, then that profit realized is a short-term capital gain.
Tax Rate The tax rate on STCG relating to equity shares listed on a recognized stock exchange or equity-oriented mutual funds will be 15%(add surcharge as applicable and cess). Where you stand, individually in your tax brackets does not matter.
STT Exemption: For STCG, the tax levied by the investor on STT while selling the shares. The STT rate for equity shares is 0.1% for delivery-based deals and 0.025% for intraday deals. However, the STT is an independent levy and hence required to be calculated for the net tax liability.
LTCG LTCG :
If you held shares or securities for over 12 months, then tax imposed would be long-term capital gain tax on the proceeds realized. Provided you sell your shares after more than a year has elapsed since you purchased the shares, you shall be paid long-term capital gain.
Tax Rate: LTCG arising from listed equity shares or equity mutual funds falls in the tax net at 10% (along with surcharge and cess) if the profits exceed ₹1 lakh in a financial year. Fully ₹1 lakh of such LTCG is tax exempt meaning that if your total LTCG is involved in all your equity investments are less than ₹1 lakh in a financial year, you don’t have to pay tax on it.
STT and LTCG: For LTCG, STT is deducted on equity shares while selling. Also, LTCG would be calculated after considering the STT paid on equity shares. However, LTCG tax rate is better for long-term investors; therefore, it is a very good option for long-term wealth generation
2. Tax on Dividends
Besides capital gains, the other source of income for the investors is dividends disbursed by companies. Dividends constitute that portion disbursed to the shareholders directly from the profits. Dividend income is also considered taxable under the Indian Income Tax Act.
Tax Rate on Dividends:
According to the Finance Act, 2020, dividend income is taxed in the hands of the shareholder and a tax slab rate is provided by the law. For an individual taxpayer, it would be 5 percent to 30 percent based on total taxable income. Alongside this, surcharge and cess will be calculated on the basis of the taxpayer’s income.
TDS:
he corporations need to deduct TDS at the rate of 10% on dividend income exceeding ₹ 5,000 in a financial year. Nevertheless, if the shareholder fails to provide the PAN details, then the TDS rate might shoot up to 20%. The TDS deducted can be further offset against the investor’s total tax liability filed in his income tax returns.
3. Taxation of Futures and Options (F&O) Trading
There are many active Indian traders trading in Futures and Options (F&O) as well. As F&O contracts are treated as business income, unlike the case with direct investment in stocks, it is taxed.
Tax Rate:
Income from futures and options trading is taxed under a single slab rate of income tax. You add this F&O income to your overall income, and the applicable tax rate is that of your overall taxable income.
GST on F&O:
Derivative transactions attract GST @ 18% on brokerage and transaction charges.
Loss in F&O Trading:
The loss from the F&O trading is allowed to be set off against any other business income or even carried forward up to 8 years so that provision can be made to their future profits. It gives some relief to the traders who incur losses .
4. Securities Transaction Tax (STT)
STT is a tax on sales and purchases of securities traded in the Indian stock exchanges. The rate differs with each type of transaction and is very significant in figuring the income tax from the stock market.
For Equity Shares: STT is levied at 0.1% of the transaction value in cases of delivery-based trades; however, it is 0.025% for intraday trades.
For Derivatives : In the case of F&O, STT is levied at 0.05% while selling options and 0.01% while selling futures.
In its very nature, STT constitutes a part of the general tax system in finding capital gain or loss.
5. Tax Planning for Stock Market Income
Proper tax planning can save taxes from the profits realized from the stock market. The investors may adopt the following strategies for better saving of taxes:
Long-term holding: If the shares are held for more than 12 months, then the investors will be eligible to avail of the concessional rate of LTCG and the exemption of ₹1 lakh, thereby reducing tax liability substantially.
Investment in tax-friendly schemes: The tax-deferred or tax-free investment avenues – Public Provident Fund (PPF), National Pension Scheme (NPS), and Tax Saving Fixed Deposits, where a person can claim an exemption/deduction under Section 80C of the Income Tax Act.
Offsetting Losses:
If there is a loss in the stock market, one can offset capital losses against capital gains in the same financial year. Losses carried forward can be used for 8 years.
Tax-Efficient Funds:
Some mutual funds are tax-efficient. These have usually been the Index Funds or the Exchange-Traded Funds (ETFs), as these have relatively lower turnaround and therefore lesser taxable events in the long run.
Conclusion
Knowing taxations on earnings from the stock market is important for every long-term investor and active trader in India. The short-term capital gain and long-term capital gain are the two categories through which the Income Tax department classifies the tax system. This provides opportunities for investors to optimize their tax liability through tax-efficient strategies.
Regardless of the source of your income-capital gains, dividends, or profits from any type of derivative trading-you can have the maximum yield of your investments if you keep tabs on taxes and well advance investment planning. Monitor the prevailing tax laws as well as its exemptions and deductions. Your investments will then be as tax-efficient as possible.
One should always take the services of a tax professional or a financial advisor to learn the details better about tax regulations; however, one needs to make sure that he or she is well within all that the law requires and at the same time benefits from saving opportunities through the Indian Stock Market.