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It’s almost that time of the year! And by that, we mean it’s time to pay your taxes. So if you invest in the stock market, it may mean a couple of things to you! Like paying shares tax on the profits you have made.
But wait. Are you wondering if shares are taxed in India? Let us help you.
The answer is a big fat YES! And why not?
The share market is a crucial component of the Indian economy. In fact, post-pandemic, there was a massive influx of young Indians into the stock market.
There were 10.4 million active investors in India by 2020. This helped 1500+ businesses on the NSE to expand by 9% in the third quarter of 2020.
Moreover, there were 142 million more individual investors in the share market in FY21, including 122.5 million new accounts at Central Depository Services Limited (CDSL) and 19.7 million at National Securities Depository Ltd. (NSDL).
Because the share market allows investors to earn returns through capital appreciation and dividends, it is only wise to levy taxation on shares. Let’s see how!
Taxation on shares and other securities in India falls under the provisions of the Income Tax Act of 1961. The taxation of shares depends on the nature and duration of the investment and the type of security.
In India, the taxation of shares as long-term or short-term capital gains depends on the holding period.
Short-term capital gains arising from selling shares held for less than a year. According to Section 111A of the Income Tax Act of 1961 (referred to as the “IT Act”), such capital gains are liable to tax at a rate of 15%.
The long-term capital gains tax applies to gains arising from the sale of shares held for more than 12 months. They calculate the gains as the difference between the sale price and acquisition cost. This includes expenses incurred in acquiring the shares.
Taxation of long-term capital gains (LTCG) on shares is at a flat rate of 10% without the benefit of indexation. Indexation refers to adjusting the cost of acquiring an asset to account for inflation over the holding period.
Note: LTCG on shares, equity-oriented mutual funds, and unit-linked insurance plans (ULIPs) exceeding INR 1 lakh in a financial year are eligible for taxes.
If your share transaction results in a capital loss rather than a gain, the loss may be offset against the profits you have achieved. Long-term capital loss can only be adjusted against LTCG. However, a short-term capital loss may be adjusted against STCG and LTCG.
The loss may be carried over for an additional eight years if it cannot be fully recovered in the year the shares are sold. This covers both short-term and long-term capital losses. But only provided you submit your income tax returns before the deadline.
Transactions made via the stock market under Sections 111A and 112A are often levied an STT.
Taxation on long-term capital gains is under Section 112 of the IT Act. At the same time, taxes on short-term capital gains are levied at the investor’s appropriate slab rates if the transaction is not subject to STT for whatever reason.
According to Section 112 of the IT Act, the investor may choose between a 20% with indexation or a 10% without indexation tax rate, depending on which is most advantageous.
Before March 31, 2020, the dividend from an Indian firm was exempt (FY 2019-20). The reason? The company issuing the dividend already paid dividend distribution tax (DDT) before payment.
The Finance Act of 2020, however, changed the way of taxing dividends. Now, the investor or shareholder is responsible for paying taxes on any dividend they receive after April 1, 2020
Taxation on dividends received from domestic companies is flat at 10% for individuals and Hindu Undivided Families (HUFs). At the same time, taxes on dividends from foreign companies is at the applicable slab rate.
However, it is important to note that companies must pay a dividend distribution tax (DDT) on the dividends declared at a rate of 15%. This tax is deductible at source. And the dividends the shareholder receives are net of the DDT. However, DDT does not apply to dividends received by foreign companies.
Generally, an Indian investor must pay capital gains tax on any profits from selling overseas equities. For taxes, they consider investments made in overseas shares at par with those made in unlisted shares.
Under the Reserve Bank of India’s (RBI) Liberalised Remittance Scheme (LRS), residents of India may invest up to $250,000 (about INR 18.75 million) in equities listed on international stock exchanges each fiscal year.
The tax rates depend on how long the investor keeps the foreign stock after purchasing it. As a result, long-term capital gains on international equities would be taxable at 20% after claiming the advantage of indexation. Still, short-term capital gains would be taxed at the appropriate slab rates for Indian investors.
Understanding the taxation of shares in India is important for you to make informed decisions and plan your investments effectively. You can use this knowledge to:
We are optimistic that you have a fair understanding of the taxation of shares in India after reading this blog. However, if you have questions, it’s best to speak with experts like GJM & Co. accounts.
Our experts will walk you through the current taxation slabs, explain the taxes that apply to you, and help you with tax filings. We will also help you stay compliant by filing your income tax returns within time and advise on how to save your taxes.
Should you have any queries or need consultation, Schedule a Call today or write to us at info@gjmco.in.