Investing in the stock market can be a profitable venture, but it’s important to understand how gains from these investments are taxed in India. In this article, we will discuss the basics of stock market taxation in India and what beginners should know.
Capital Gains Tax:
When you sell a stock or share and make a profit, it’s considered a capital gain. Capital gains are taxed in India, and the tax rate depends on whether the investment was held for the short term or the long term.
Short-term capital gains (STCG) are gains made from selling an investment held for less than one year. STCG is taxed at a flat rate of 15%.
Long-term capital gains (LTCG) are gains made from selling an investment held for more than one year. LTCG on listed securities is taxed at a flat rate of 10% if the gains exceed Rs 1 lakh in a financial year. In recent years, there has been a change in the tax rate for LTCG. Prior to April 1, 2018, LTCG was exempt from tax. However, the government introduced a 10% tax on LTCG on listed securities, with some exceptions, from that date.
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Tax Deducted at Source:
When you sell a stock, the brokerage firm or the stock exchange deducts a tax called Securities Transaction Tax (STT) at the rate of 0.1% of the transaction value. STT is a direct tax on securities transactions, which is collected by the government.
In addition to STT, tax is also deducted at source (TDS) from your capital gains. TDS is a tax that is deducted by the payer before making a payment, and it is deposited with the government. TDS on capital gains is applicable only for NRIs (Non-Resident Indians), and the rate is generally 20%.
Indexation is a technique used to adjust the purchase price of an asset for inflation. This is important because inflation erodes the value of money over time, and it can result in a higher tax liability for long-term capital gains. Indexation benefit is available for LTCG on non-equity assets such as debt mutual funds, bonds, and real estate. However, the benefit of indexation for the calculation of LTCG on debt mutual funds has been eliminated by the Central govt for investments made on or after April 1, 2023.
For example, if you bought a bond for Rs 10,000 in 2010 and sold it in 2022 for Rs 15,000, your capital gain would be Rs. 5,000. However, if you factor in inflation, the purchase price of the bond in 2010 would be higher. Suppose the inflation rate for the period was 5%. In that case, the indexed cost of the bond would be Rs. 13,440, and the capital gain would be Rs. 1,560. The LTCG tax on this capital gain would be 10%, which is Rs. 156.
Tax Saving Strategies:
There are various tax-saving strategies that investors can use to reduce their tax liability on capital gains. One of these strategies is to invest in tax-saving instruments such as Equity-Linked Saving Scheme (ELSS) mutual funds and Public Provident Fund (PPF). ELSS funds have a lock-in period of three years, and investments in PPF are eligible for tax deductions under Section 80C of the Income Tax Act.
Another strategy is to invest in tax-free bonds. These bonds are issued by government entities and pay interest that is tax-free. The capital gains from selling tax-free bonds are also tax-free.
Investing in the stock market can be a great way to grow your wealth, but it’s important to understand how gains from these investments are taxed in India. Beginners should be aware of the different tax rates for short-term and long-term capital gains, the tax deducted at source, and the benefits of indexation. By using tax-saving strategies, investors can reduce their tax liability and maximize their returns.
(By Ravi Singhal, CEO, GCL Broking. Views are personal.)