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Despite the rollercoaster ride of the pandemic, the Indian equity markets have been a beacon of hope for investors. Yet, with great returns come great tax responsibilities.
Before you start counting your profits, have you considered the taxes that come with it? That’s right, the taxman always wants a piece of the pie.
So, let’s dive into the world of taxes and unravel the mysteries of how gains from the stock market are taxed in India.
Capital gains
Under the Income Tax Act of 1961, gains from the sale of shares fall under the head ‘Capital Gains.’
Capital gains are further classified into two categories:
1. Short-term capital gains (STCG)
If you sell your shares listed on a stock exchange within 12 months of purchasing them, you might end up with short-term capital gains or losses.
The calculation is simple: (sale price – expenses on sale – purchase price). If you make a profit, you’ll have to pay tax.
Short-term capital gains are taxable at a rate of 15%, regardless of your tax slab rate.
2. Long-term capital gains (LTCG)
If you hold on to your shares for more than 12 months before selling them, then you’ll deal with long-term capital gains or losses.
If your long-term capital gains exceed ₹1 lakh from the sale of equity shares or equity-oriented mutual fund units, you’ll have to pay a 10% tax (plus applicable cess). The benefit of indexation is not available in this scenario.
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Grandfathering clause: A twist in the tale
The government introduced a “grandfathering rule” for gains starting from 1st February 2018. Any long-term gains from equity instruments purchased before 31st January 2018 will be calculated according to this rule.
To calculate the acquisition cost for the grandfathering clause, you need to consider the fair market value (FMV) as of January 31, 2018, or the actual selling price, whichever is lower.
FMV, or the actual purchase price, whichever is higher, is used to calculate the long-term capital gain.
Loss from equity shares
Short-term capital loss (STCL)
If you’ve incurred a loss from selling equity shares within a year of purchase, you’ve got yourself a short-term capital loss (STCL). This loss can be offset against any short-term or long-term capital gains you make from any capital asset.
If the loss isn’t fully offset, you can carry it forward for eight years and use it to adjust against any capital gains during that period.
To carry forward these losses, you must file your income tax return within the due date.
Also Read: What is demat account: All you need to know?
Long-term capital loss (LTCL)
With the Budget of 2018, you can set off your long-term capital losses against any other long-term capital gains and not against short-term capital gains.
Any unabsorbed long-term capital loss can be carried forward for up to eight years.
Indexation benefit
Inflation eats away the value of money over time and can lead to higher tax liabilities on long-term capital gains. But the Indexation benefit comes to the rescue.
Indexation is a technique used to adjust the purchase price of an asset for inflation. By factoring in inflation, the indexed cost of the asset increases, which can reduce your taxable gains.
A peek into the taxing world of different types of equity shares
Mutual fund taxation
Mutual funds, the popular choice for many investors, also have their own set of tax rules.
Equity Mutual Funds
If you hold equity mutual fund units for 12 months or less, you’ll be dealing with STCG tax at a rate of 15%. But if your holding period exceeds 12 months, you’ll pay a 10% tax on cumulative capital gains exceeding ₹1 lakh in a financial year.
Debt Mutual Funds
For debt mutual funds, the holding period matters. If you redeem units within 3 years of holding, you’ll be dealing with STCG tax as per your income tax slab rate.
But if you hold on for more than 3 years, LTCG tax enters the scene. You’ll pay 20% tax with indexation. Remember that the earlier provision of opting for LTCG tax at 10% without indexation is no longer available for units sold after July 10, 2014.
Also Read: Margin trading: Exploring the risks and rewards
Are you ready to harness the power of tax-savvy investing? With the right strategies and a keen eye on tax implications, you can maximise your gains and minimise your tax burden. So, why not confidently embark on this journey and take control of your financial destiny?
FAQs
If you make a short-term capital gain, you will be taxable at a rate of 15%, regardless of your tax slab rate. However, if you make a long-term capital gain from the sale of equity shares/equity mutual fund units that exceed ₹1 lakh, you’ll have to pay a 10% tax.
Yes, there is a tax on intraday trading in India. Any gains that you make from day trading or intraday trading are treated as business income. This income is added to your total income and taxed according to your income tax slab.
Yes, it is compulsory to file ITR for intraday trading. Intraday trading is simply the buying and selling of stocks within the same day. So, it is essential to note that any gains or losses made during this process should be reported when filing your income tax return.
To calculate your tax, use the formula: Sale price – Expenses on sale – Purchase price). If you make a profit, you’ll have to pay short-term or long-term capital gain tax, depending on what your holding period is.
If you incur a long-term capital gain that does not exceed ₹1 lakh, you will not have to pay any tax. However, if the gain exceeds ₹1 lakh, then you will have to pay a 10% tax. For short-term capital gain, the tax will depend on your tax slab.