Income tax implications on Demat Account?
To invest in shares, bonds, mutual funds and other varied financial securities, it is mandatory to open a Demat account. It is also important to note that any profits booked by you by selling shares in your Demat account are liable to tax. That is why you need to be aware of tax implications on your Demat account according to the provisions of the Income Tax Act 1961. Let us a look at a few aspects of taxation that you should be mindful of:
Tax on gains made in the short term
Any profit that you earn by selling shares, debentures, bonds, mutual funds etc within one year of their purchase, is considered as a short-term capital gain. This is liable to a flat 15% securities transaction tax (STT) under the Income Tax Act. In instances wherein STT does not apply, the capital gain made by you over the short term is clubbed with your total taxable income. Further tax calculation is done as per your eligible income tax slab.
Tax on profits made over a longer term
A capital asset that you hold for more than a year is classified as a long-term capital asset. A gain made by you on the sale of such a long-term capital asset is termed as long-term capital gain (LTCG). Just like a tax on capital gains made over the short-term as explained above, longer-term capital gains are also taxed as per Income Tax regulations.
Capital gains made over a longer duration to the tune of Rs 1 lakh for a financial year are exempted, however, a flat 10% tax applies on any gains over and above this amount.
Selling your capital assets at a price lesser than the amount at which you purchased them leads to a loss of capital. Capital assets held by you for less than 12 months attract a short-term capital loss (STCL). Income Tax laws allow you to set off your capital loss incurred over the short term against the corresponding capital gains made in the financial year.
You can also carry forward your STCL for a maximum of 8 financial years in the future if it is not settled in a particular year. This forwarded loss can be set off against either STCG or LTCG made by you during the year.
Loss of capital due to the sale of an asset after a year below the purchase price is classified as a long-term capital loss. It was neither allowed to be set off nor carried forward until February 2018 when an Income tax notification changed the taxation process.
If you are an investor holding a Demat account in India and incur a long-term capital loss for a transfer made on or post-April 1, 2018, you can set it off against long-term capital gains for that financial year. Similar to the STCL, the long-term capital loss is also allowed to be forwarded for up to 8 years, which can then be settled only against the corresponding LTCG made by an investor during a particular year.
Armed with this information, you can take advantage of the benefits of operating the account while also being aware of taxation. If you want to claim a tax deduction and increase your savings, you can consider investing in a Unit linked investment plan (ULIP) or Equity-linked Savings Scheme (ELSS) of a mutual fund
They can help you save up to Rs 1.5 lakh in a financial year. While the maturity amount of a ULIP is also tax-exempt, the long-term capital gains on ELSS funds are taxed only if they exceed Rs 1 lakh.