Investment In Stock Market Taxation Simplified

Investment In Stock Market Taxation Simplified


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In the fiscal year 2021, the stock market reached an all-time high, and many investors may have taken profits during the year. While we all pay attention to the taxation of income from salaries, rent, and enterprises, we often overlook the tax on stock market gains.

Income is further divided into two categories under the heading ‘Capital Gains’: 

  • Long term capital gains
  • Short term capital gains

This classification is based on how long the shares have been held. The holding period refers to the time that an investment is held from the time it is purchased until it is sold or transferred.

It should be noted that different classes of capital assets have different holding periods for shares and securities. The holding periods of listed equity shares and equity mutual funds differ from the holding periods of debt mutual funds for tax purposes. Their taxability differs as well.

The tax consequences of listed securities and income tax on stock trading will be discussed in this article.

Gains On Equity Shares Are Taxed

  1. Short-Term Capital Gains (STCG)

Short-term capital gains are earned when an investor buys a stock and sells it after holding it for one year or less. The same restrictions apply to equity-oriented mutual funds as they do to shares on the STCG. 

The seller may make a short-term capital gain (STCG) or a short-term capital loss (STCL) if equity shares listed on a stock exchange are sold within 12 months of purchase (STCL). When shares are sold for a higher price than when they were purchased, the seller makes a short-term capital gain.

Land, buildings, house property, gold, trademarks, equity shares, patents, leasehold rights, machinery, and other capital assets are some of the most common instances.

Section 111A of the Income-Tax Act discusses the tax rates on securities. For example, listed equity shares are subject to a 15% short-term capital gains tax.

  1. Long-term capital gains (LTCG)

When shares are held for more than a year and subsequently sold, the profit generated is referred to as long-term capital gains (LTCG). Long-term gains are not taxed the same way as short-term gains. Long-term capital gains are defined as investments that provide profits over a period of one to three years.

When someone makes an investment, it is always with the intention of making a profit. There are investments that generate returns in a short amount of time and others that provide returns over a longer period of time. Long-term capital gains are defined as profits from assets such as mutual funds, zero-coupon government bonds, and so on.

Long-term capital gains are taxed at a rate of 20%, plus additional cess and surcharges, such as the education cess if they apply. To alleviate the burden of high taxes, the government has given some exclusions in certain instances. When a gain is eligible for such exemptions, the tax on them may fall from 20 percent to merely 10 percent. The appropriate fees and cess shall remain unchanged. Here, there are 3 things to be kept in mind:

1. The Rs 1 lakh limit includes any gains from equities mutual funds if any.

2. Gains of up to Rs 1 lakh are tax-free.

3. Beginning in the Financial Year 2020-2021, dividend income from equities is taxed at the applicable slab rate.

Tax on Mutual Funds

  1. Equity Mutual Funds

Equity mutual funds are subject to the same restrictions as equity shares. Short-term capital gains on equities mutual funds will be taxed at 15% plus cess and surcharge. Long-term gains above Rs 1 lakh would be taxed at a rate of 10% plus cess and taxes.

  1. Debt Mutual Funds

The tax on debt mutual funds is also affected by how long they are held. Short-term gains are those that last less than three years, while long-term gains last more than three years. In both of these the tax rates are:

  • Long-term investment: 20% with indexation
  • Tax at slab rate + cess and surcharge in the short term.
  1. Hybrid Mutual Funds

If a hybrid mutual fund invests more than 65 percent of its assets in stocks, the profits are taxed in the same way that stock mutual funds are. However, if less than 65 percent of AUM is invested in equities, earnings are taxed similarly to debt mutual funds.

  1. Gold Mutual Funds

Debt mutual funds and gold mutual funds are taxed at the same rate. Long-term profits from gold mutual funds will be taxed at a 20% indexation rate, while short-term gains would be taxed at a slab rate.

  1. Dividend Income From Mutual Funds

Dividend income from Mutual funds is taxed at the slab rate.

Securities Transaction Tax (STT)

All equity shares traded or bought on a stock exchange are subject to the Securities Transaction Tax (STT). Only shares listed on a stock market are subject to the aforementioned tax effects. STT applies to any stock exchange sale or buy. As a result, the tax implications outlined above apply exclusively to shares that are subject to STT.

When buying or selling an equity share (delivery-based), for example, both the buyer and the seller must pay STT of 0.1 percent of the share value.

In Conclusion

The selection of the right assets is critical for both capital preservation and appreciation. When it comes to investing in listed securities, the correct investment instrument will depend on a variety of aspects such as your investment aim, time horizon, risk-reward analysis and risk appetite, liquidity, tax incidence, and value buying.

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