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Short Term Capital Gains Tax On Listed Shares

Short term capital gains

Before we understand how capital gains on listed shares are taxed it is important to understand how stock trading happens in the Indian stock market.

 

Indian Stock Market

 

A popular way to build wealth is by investing in equities, as the stock market has the potential to produce lucrative returns. When investors buy a company’s stock, they not only become a part-owners of the business but also gain from an increase in the share price of the company. They can choose to sell the stock of the company at an appropriate time. Essentially, investors benefit from capital appreciation when the value of their investment increases. Investing in the stock market can be very advantageous to investors if he/she is able to identify the correct stock to invest in.

 

Having said that, it is important to be aware of the risk involved with the stock market. Investors may benefit from a rising market, but they may also lose money if the market declines. To take advantage of stock market potential, investors need to grasp how the stock market operates and how their gains are taxed. Let us understand the fundamentals of the stock market.

 

 

What Exactly Is A Stock Market?

 

A stock market is a marketplace for buying and selling stocks as well as other securities including bonds, currencies, commodities, and derivatives. Companies can list their stocks for sale on the stock market in order to raise capital. Additionally, it offers investors a platform to trade listed equities in order to earn returns.

 

What Is A Stock?

 

Companies issue stocks as a way to raise funds. Stock, often known as a share, refers to ownership of a corporation on a per-unit basis in form of a tradable instrument. An investor is considered to have acquired 10% ownership of a company if it issues 10,000 units of stock and the investor purchases 1000 of those units. Investors have the option to receive dividends on their stock investments as per the discretion of the issuing company. Furthermore, if the price of the share increases, investors’ portfolio goes up. A stock market is a venue where shares of listed companies can be bought and sold.

 

What Are The Different Stakeholders In A Stock Market

 

There are many participants in the stock market. In the stock market, each entity has a certain role to play. Here are some examples of the various stock market entities:

 

 

 

 

 

 

 

 

Now that we are clear with how the stock market works. Let us understand how your profit/income in the stock market is taxed especially the tax on capital gains.
 

Taxation Of Shares

 

You must pay taxes on your gain if you invest or trade on the stock market. Following are the categories of income/profit one can make from the stock market.

 

Let us examine these in detail.

 

If you hold investments in listed shares for a period longer than a year, any profit or gain on account of selling the share is regarded as a long-term capital gain. No tax needs to be paid on long term capital gains upto a limit of INR 1 lakh. Capital gains over Rs. 1 lakh are subject to a 10% tax. Let’s use an example to better grasp this:

Consider that after investing Rs. 5 lakh in a stock of XYZ Ltd., you sold it for Rs. 6.5 lakh. The gain of Rs. 1.5 lakh is regarded as long-term capital gain and will be taxed as such. Listed shares were exempt from LTCG tax up until FY 17–18.

 

If you hold listed shares for less than a year, any profit or gain from those investments is regarded as a short-term capital gain. STCG is subject to a flat tax of 15%. Let’s use an example to better grasp this:

Consider purchasing 100 shares of XYZ Ltd. at Rs. 1000 each, then selling every share at Rs. 1050 after six months. Gain of Rs. 50*100 = Rs. 5000 is categorized as STCG and is subject to a flat tax at the rate of 15%.

 

Income arising from trading stocks or equities on an intraday basis or non-delivery basis is classified as business income under Section 43(5) of the Income Tax Act. Income from these kind of transactions are added to your income and taxed in accordance with your tax slab applicable to you. As a result, if a person makes Rs. 8 lakh per year from his salary and makes Rs. 50,000 in intraday trading, his total taxable income will be Rs. 8.5 lakh, which will be taxed at the applicable slab rate.

 

Uptill FY 19–20, in case the entire dividend income from stock were less than Rs. 10 lakh, dividends were tax-free in the hands of investor. Dividend income that use to exceed Rs. 10 lakh was subject to taxation at flat rate of 10%. However, dividends earned by the investors starting from the fiscal year 20-21 are subject to tax as per the individual’s tax slab. In other words, your dividend income will be added to your income, and will then be taxed according to your income tax slab.

 

According to income tax laws, any loss under the heading “Capital Gains” may only be offset by income under the same heading. It cannot be offset by any other income head, such as a wage or business income.

Short-term capital losses are permitted to be set off against both LTCG and STCG, while long-term capital losses can only be offset against LTCG. If you are unable to offset your whole loss in the same financial year, there is also a provision for losses to be carried forward. For eight assessment years immediately following the assessment year in which the loss was initially computed, both short-term and long-term capital losses may be carried forward.

 

How To Save Tax On Equity Investments – ELSS Mutual Funds

 

The government of India has introduced a special scheme to encourage investment in listed equities. It is called Equity Linked Saving Scheme, under this scheme, investments made in ELSS mutual funds are exempt from income-tax under Section 80C of the Income Tax Act, 1961 upto a limit of INR 1.5 lakh per year.

 

What Is An ELSS Mutual Fund?

 

An ELSS fund is a type of equity mutual fund that enables stock investments along with tax exemption under Section 80C of the Income Tax Act. One of the finest ways to profit from the stock market and save tax at the same time is investing in ELSS mutual funds. By investing in ELSS funds, you can receive an annual tax exemption of up to Rs 1,50,000 from your taxable income.

ELSS mutual funds have a three-year lock-in period which is mandatory and cannot be waived in any condition. There is no option to withdraw your money before three years, and this period is non-negotiable. Your income at the conclusion of this period is regarded as a long-term capital gain (LTCG), which is subject to a 10% tax if it exceeds Rs 1 lakh. However, the income invested in the ELSS mutual fund is tax exempt.

 

ELSS Mutual Funds Explained

 

Here are some crucial characteristics of ELSS mutual funds that you might find interesting:

 

 

 

 

 

Who May Invest In ELSS Funds?

 

All investors looking for an investing alternative to produce income and reduce taxes should consider ELSS funds. They are especially advised to people with lesser risk tolerance and appetite, such as those with modest salaries. The ability to invest in ELSS funds is not age-restricted. As a result, newly employed professionals can invest their hard-earned money in these programmes.

Investors who wish to diversify their holdings and are searching for a new alternative to add to their portfolio can consider ELSS funds.

 

What Factors Ought to Be Taken Into Account Before Investing In ELSS Funds?

 

Examining an ELSS fund’s long-term performance is crucial before investing. In addition, here are some other things to think about before opening an account.

 

 

 

 

 

Conclusion

 

Before investing in stock market, it is important to understand the various factors that may impact your investment. One of the most important factors is taxation. If you are unaware about the applicable tax rate your investment strategy will definitely falter.

 

Did you know? You can now invest in ELSS or tax-saving funds on Kuvera:

 

Step 1: Download the Kuvera app or visit our website.

Step 2: Create your account on Kuvera by completing the mandatory KYC procedure. This will hardly take a few minutes. Once that’s completed, select the ‘Invest’ option on our homepage after which you can select ‘Mutual Funds’ and ‘ELSS’.

Step 3: Kindly go through the list of all zero-commission direct plans of ELSS schemes to start investing.

 

Interested in how we think about the markets?

 

Read more: Zen And The Art Of Investing

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