Tax payable for Investing in Stocks
Making money from Indian stock market was never so simple. Even though markets are in the upswing we can find more and more people losing in stocks. A close study shows non understanding of financial markets as the major reason for this. Fundamental study helps you to identify potential winners which can be multi-baggers. Technical analysis helps to time the markets. But there is one more important factor that affects the profits of your investments that is Tax. In this article we have briefly explained different types of Taxes that influences your Returns.
Securities Transaction Tax (STT)
Securities Transaction Tax (STT) is a tax on the value of shares bought and sold on a stock exchange. The Tax has to be paid irrespective of your profit or loss; it is a turnover based tax. STT has been introduced in the in the year 2004-05. It is levied on the purchase or sale of equity shares, derivatives, equity-oriented funds and equity-oriented mutual funds’
The current rate of STT is 0.125% of the transaction volume.
As mentioned earlier, Securities Transaction Tax (STT) is a tax on the total turnover, irrespective of the profit or loss involved. Even if there is no profit you have to pay STT.
Items fall under the category of 'Securities'
'Securities' are defined under Section 2(h) of the Securities Contracts (Regulation) Act, 1956 (SCRA). It includes the following:
- Shares, bonds, debentures, or other marketable securities of same nature of any incorporated company or other body corporate
- Derivatives
- Units or any other instrument issued by any collective investment scheme to the investors in such schemes
- Security receipt as defined in the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002
- Such other instruments as declared by the central government; and
- Rights or interest in securities
- Equity-oriented mutual funds
Securities Transaction Tax (STT) is not applicable in case of government securities, bonds, debentures and units of mutual fund other than equity oriented mutual fund.
STT & Traders
For traders, in other words people who buy and sell stocks frequently, STT is a nuisance factor. They have to pay this tax on every single transaction – even if they incur loss. Since these people make profit by selling as soon as the price goes up, they are not too much concerned about long term capital gain, for these people gains are always short term. Traders are the ones who are suffering because of the STT.
STT & Investors
In case of a genuine investor the scene it totally different. An investor is a person who doesn’t buy and sell shares frequently; normally he is a buy-and-hold person. Investors go by evaluating the strength of the company’s operations, and not by its short term stock price Fluctuations.
Even though STT needs to be paid on every transaction, an investor wouldn’t suffer much because of his low trading volume. Compared to a trader an investor trades less and keeps the possession of the stock for a longer period. Since an investor follows a buy-and-hold strategy, his gains are always long term. Since there is no tax on Long TermCapital Gain an investor benefits immensely.
STT & exemption of Long Term Capital Gain (LTCG)
Long Term Capital Gain (LTCG) from the sale of shares on which Securities Transaction Tax has been paid is exempt from income tax. Thus, Long Term Capital Gain (LTCG) exemption and STT are inherently linked.
A genuine investor trades less compared to a trader most of his profits as long term capital gain (LTCG). A genuine investor will be always benefitted from the Securities Transaction Tax (STT) and the subsequent continuation of exemption of long termcapital gains (LTCG).
Capital Gain
A Capital Gain can be any income generated by selling a capital investment. A capital investment can be anything like stocks, business, paintings, houses, family businesses, farmhouses, etc.
How to Calculate Capital Gain
Capital Gain = ( Full value of consideration received or accrued on transfer of capital asset) - ( Cost of acquisition of capital assets + Cost of improvement of capital assets + Expenditure incurred exclusively in connection with the transfer of capital asset such as stamp duty, registration charges, legal fees, brokerage etc.)
Asset | Short Term | Long Term |
Shares or any other security listed in a stock exchange in India or a unit of a Unit Trust of India or a unit of a mutual fund. | Less than 12 months | More than 12 months |
Assets other than mentioned above. | Less than 36 months | More than 36 months |
In case of stock investment, income generated by holding the securities for more than 12 months is considered as long term Capital Gain.
Tax on short term and long term capital gains
· Short-Term capital gains
· Long-Term capital gains
Short-Term capital gains
For sale of equity shares, units of equity oriented mutual fund to mutual fund the gains are taxable at the rate of 15% (+surchage +education cess) under section 111A
Long-Term capital gains
For sale of equity shares, units of equity oriented mutual fund the gains are exempt from tax under section 10(38)
Capital Gain | Tax Rate |
Short-Term | 15% |
Long-Term | Nil |
Tax exemption for Dividend earned
As per the Income Tax Act, 1961 there is a provision benefit in Income Tax, if the assessee has an income as a dividend on investment in any of the following:
- Shares
- Mutual Funds
- Unit of UTI
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