Thus, stock trading enables an individual to make large amounts of money with high risks; however, one should know about the taxes linked to it. Understanding how taxes work in relation to investments can be useful in making proper choices and improving the portfolios’ performance in terms of tax liability. This blog shall put a focus on understanding the major factors on how one could be taxed in the stocks, how capital gains and dividends are taxed, tax-loss trading, and the provisions under the income tax act in India.
Capital Gains Tax
In essence, it is in the form of the Short-Term Capital Gains and Long-Term Capital Gains classification.
The tax treatment of capital gains in the stock market depends on the holding period of the investment:
Short-Term Capital Gains (STCG): When it comes to investments that have been disposed within the financial year or within a period of 12 months, they are considered as short term capital gains. Consequently, STCG on equity shares and equity oriented mutual funds is subject to a tax of 15% without any indexation advantage in India.
Long-Term Capital Gains (LTCG): Specifically, if the investment is sold after more than 12 months from the date of purchase, it is considered as the STT Long term capital gain. The LTCG in excess of INR 1 lakh on equity shares and equity oriented mutual funds is exigible to taxation at the rate of 10% without any benefit of indexation.
Calculation of Capital Gains
Capital gains typically involves the purchase price, which is also referred to as cost of acquisition, the selling price, and the cost related with the transaction like the broker’s fee. The formula for calculating capital gains is:
The profit to be made from the sale of an asset is measured as the difference between the proceeds and the cost of selling the asset, Capital Gains=Sale Price−(Purchase Price+Transaction Costs).
For instance, if you invest INR 1 lakh in shares to be traded, and they are sold at INR 1. 5 lakh after one year, your LTCG will be INR 50,000, which is definitely below the taxable limit. But if the gain is amounts to more than INR 1 lakh, then excess amount is again charged at a rate of 10%.
Dividends Taxation
Dividends received from stocks are also subject to taxation:
Dividend Distribution Tax (DDT): Before that, firms have to pay DDT before declaring their dividend to shareholders. However, starting from 1st of April 2020, DDT has been removed and the dividend is now subject to tax in the hand of the investor.
Tax Rates on Dividends: Dividends to the investors are charged based on the income tax rates normally known as the slab rates. Also, if the amount of the dividend income exceeds INR 5,000 in a financial year, then the company paying the amount of dividend to the shareholders required to deduct its 10% TDS.
Tax-Loss Harvesting
Concept and Benefits
Tax-loss selling, is a technique where by an investor sells his investment at a loss in order to offset against his gains ,and thus minimize his tax bill. This can be especially advantageous in illiquid conditions as the number of losses is traditionally bigger.
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How It Works
For instance if an investor sells a stock and earns a capital gain of INR 1 lakh and sells another investment and incurs a capital loss of INR 50,000 the net capital gain which will be taxed will be INR 50,000. Thus, investors can achieve optimum taxation concerning their investing and maximizing the potential for after-tax returns.
Particularities’ in the Current Indian Tax Laws
Securities Transaction Tax (STT)
STT is a tax chargeable on the acquisition of securities and transfer of securities, which are listed on the recognized stock exchanges located in India. The rate depends on the kind of transaction that is being made. For example, the STT on the sale of equity shares is 0. This is according to the two percent of the transaction value which is given as 1% to the government with the remaining 1% going to the issuer. STT is very important because it acts as a check since all transactions are recorded and it assists the government to monitor the activities of securities trading.
This work explores the process of tax on bonus shares and rights issues.
Bonus Shares: Bonus shares are received by the companies when the existing shares of the company are issued to the shareholders free of cost and therefore they are not taxable on receipt. But when these shares are disposed, the gains hence derived are arrived at using the cost basis of the shares on which the bonus was declared.
Rights Issues: Here, when the rights issue is sold the amount by which the market price is exceeding the issue price of rights shares is known as capital gain.
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Gift Tax
Any receipt of shares and securities as gifts attracts tax in the situations that the value of the shares or securities received as a gift together with the money is more than INR 50000 in a year. There is a tax related to the fair market value of the shares received as gift, unless received from a close relative or on special occasions.
Double Taxation having a detrimental impact on foreign Investment was solved through the agreement of Double Taxation Avoidance Agreements (DTAA).
Similarly to keep one single income from being taxed in both the countries, India has signed Double Taxation Avoidance Agreements (DTAA) with several other countries for non-resident investors. In the structures of these agreements, it is possible to lower the rate of taxation for capital gains and dividends for non-residents of the country according to certain conditions.
Tax Filing and Reporting
Annual Tax Return
Whenever an investor engages in trading in the stock market, any gains realized have to be declared in your tax returns as capital gains and any income of dividend also has to be declared as income. This means that documentation of the purchase and sale of the security, dividends received and any related expenses are helpful in this general objective.
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Advance Tax
An investor filing his return for a financial year who has a tax liability of more than INR 10,000 he has to pay advance tax in four equal instalments. This requirement requires that the tax is paid on time and rules out full interest charges which is besides costly.
Conclusion
It is, therefore, vital that any investor who deals in the stock market gets acquainted with the existing taxation laws on the investments. It is always important to be up to date with the existing tax laws and for that it can be wise to seek advice from a tax consultant from time to time. Based on tax optimization concepts, one can increase the efficiency of investing activities as well as achieve the desired objectives.
