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Taxation in Stock Market
Taxation | January 06

We all engage in social discussions where we end up giving or receinving free advices for life, investment and professional life. Even though these conversations can be a kicker for the adrenaline, some topics should be left to careful observation and well placed opinions.

Especially, when it is about tax planning and investment decisions, relying on a friend’s casual advice may not be the best way to go. Why?

Well this might explain…

 

Can you spot what is wrong with this picture?

What your dear friend doesn’t know is how long you have held those shares and if the profit you just made is listed as long term or short term, the point of capital gains tax or indexation or reinvestment of these profits, might have never come up during the short discussion at the party.

If you are lucky, this friend might be more than a stock market enthusiast but if that was not the case, you just ensured paying as much as 15% in taxes.

So now, the real question is, are you willing to take that risk?

Remember, not every time a leap of faith is the right way to go, Stock Market might be an adventure but taxation is not, Better Safe than Sorry.

Another aspect to this story is, why take this risk when you can easily avoid it? The power of internet can rescue you from such a debacle, if you let it.

In order to compress the vast and quite tedious provisions, let us skip the technical jargon and rush to simplification of the process.

 

Questions you should ask?

1.     Is my Dividend exempt from income tax?

In the hands of the receipt, dividend is exempt from any income tax because the company is already paying Dividend Distribution Tax (DDT) of 17.647% (Basic Rate) & 20.358 (Effective Rate). However, if the aggregate amount of dividend received by an individual exceeds 10 lakhs, the same will be taxable.

 

2.     Duration of holding of the share?

Capital assets are categorized as short term and long term based on their holding period and Gain arising on transfer of capital asset is charged to tax under the head “Capital Gains”. Income from capital gains are classified as “Short Term Capital Gains” and “Long Term Capital Gains”.

 

Criteria For Classification of Gain/ Loss with respect to listed equity shares is :

 

Short Term Capital Gain/ Loss = Holding period Less Than 12 Months

Long Term Capital Gain/ Loss =  Holding period More Than 12 Months

PERIOD OF HOLDING 

Long Term >  12 months >  Short Term

For example if you sell the shares within 12 months of buying, it will be called short term capital gain/ loss but if you retain it for more than 12 months, then it is eligible to become long term capital asset.

 

Let us understand this categorization with an example;

Mr. Roy bought 100 shares of XYZ Ltd on 1st August 2015 and sells them on 25th July 2016.

Period of Holding = 11 months and 25 days

Since, the period of holding is less than 12 months, this transaction will be short term,

 

What if Mr. Roy had sold the shares on 2nd August 2016?

The same would be long term since the period of holding would clearly exceed 12 months.

 

3.     Will I need to pay income tax on sale of the share?

How great would it be if everything could be determined by following simple steps, we cannot comment about everything but the answer to this question can be found at the end of the following steps:

-          Step 1

Determine if the asset was long term or short term.

-          Step 2

Determine the amount of profit/loss on such sale as shown below:

 

 

Full value of consideration / sale value

      xxx

 

      (Less)

Expenditure incurred wholly and exclusively in connection with such transfer / sale

     (xxx)

      (Less)

Cost of acquisition / purchase value

     (xxx)

      (Less)

Cost of Improvement

     (xxx)

 

Capital Gains / Loss

      xxx

  

-          Step 3

Check if the transaction was chargeable to STT(Security Transaction Tax) i.e. Transaction executed on Recognized Stock Exchange. Most transactions in the stock market are chargeable to STT but the same should be checked for a conservative approach.

 

-          Step4

If you gained from the transaction

Short term Capital Gain (STCG)

STT Paid

a

r

Income Tax

Flat Rate of 15%

Include the same in gross income & calculate at Slab Rate

Long Term Capital Gain (LTCL)

STT paid

a

r

Income Tax

Exempt from Income tax but disclosure is required

Flat rate of 20% but indexation is allowed to ease the burden

 

If there was loss from the transaction

-         Short Term Capital Loss (STCL) can be set off with the profit in the same head that is STCL can be set off against STCG/LTCG.

-         Long Term Capital Loss (LTCL) , is not allowed to be set off against any head (as LTCG is exempt from tax).

-         Capital Loss can however, be carried forward for next 8 years and be set off against income of that financial year, given the above rules are followed.

 

4.     Is there any other taxes or charges applicable that I should know of?

 

Glad you asked, yes there are other taxes and duties, let us list it out for you;

 

-          Service Tax

One of the columns that show up on your statement of stock holding is service tax which is charged on stock broker’s services at a rate 15.00% (14.00% service tax, 0.50% swachh Bharat cess, 0.50% krishi kalyan cess) .

 

 

-          Securities Trsnsaction Tax (STT) [changed effective from 01.06.2016]

This tax is charged on the value of taxable securities transaction based on the volume weighted average price but the rate is as low as 0.1%. The significance of STT, however comes in picture while determining capital gain tax rate as per table given in Step 4 of question no. 3.

 

-          Stamp Duty

It is levied on value of shares transferred by the state governments and thus differ from state to state but varies from 0.002% to 0.01% for non- delivery and delivery trade.

 

-          SEBI Turnover Fees

This is usually overlooked due to the insignificance rate- 0.000005% for debt securities and 0.0002% for securities other than debt.

Even though, this might not make taxation easy, knowing what you are getting yourself in is always a good idea.

 

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