Taxes on investment

Taxes on investment

Taxes have always been seen as a bane of personal finances. They eat into your income, and all one can do is try minimizing the outgo through various tax strategies. To formulate such strategies, however, one must be aware of how each investment is taxed. Like, what are the taxes on stock investments?

Investment is taxed?! Well, not directly, but the returns sure are. There are, of course, caveats that the government has made terming certain instruments as EEE (Exempt- Exempt- Exempt: On deposit, growth and withdrawal), but they are very few.

Now, taxes on investments can happen on two fronts – one will be on the dividend or interest income you receive, and the other on the profit/net gains from the sale or redemption of securities. Also, tax on short term capital gains and long term capital gains will differ vastly.

But what are these taxes? What are the differences between short term and long term gains? Read further to know in detail the taxation process for different asset classes.

Listed stock/equity instruments Equities can generate returns for you in two forms – capital gains and dividends.

Capital gains that are realised after redemption/selling of equity securities or listed stocks attract two types of taxes, depending on the holding period (the time from when you purchase until the time you sell the shares). They are STCG (Short term capital gains) tax and LTCG (Long term capital gains) tax.

If your holding period of listed stocks/equities is less than 12 months, then according to Section 111A of the Income Tax Act, 1961, your gains are subjected to a flat 15% tax rate. Now, if your holding period is more than 12 months, then in accordance with Section 112A, any gains above the threshold of Rs. 1 lakh will be taxed at 10%, without indexation benefit (adjusted rate for inflation). These taxes would be paid along with applicable cess and surcharges.

Finally, STT (Securities Transaction Tax) of 0.025% is applicable to every transaction involving the sale of equity shares.

Remember, equity mutual funds have the same tax rates for the same period.

Note – STCG would be NIL if your total income, including the short-term gains, is less than Rs. 2.5 lakh.

Now, what about dividend gains?

Dividends from domestic companies remained tax exempted until FY 2019-20, when companies declaring dividends paid taxes before distributing dividends under the DDT (Dividend Distribution Tax) system. However, post this period, under Finance Act, 2020, dividend gains are taxed based on your income slab, with TDS applicable at 10% (which is now 7.5%, because of Covid-19) in excess of Rs. 5000. Read the example below to understand the rules better.

Confused about equity investments? Read our article’ Equity Investments: Benefits, Considerations, And Must Know Tips ‘on the Teji Mandi website.

Assume Mr. X is entitled to receive a dividend income of Rs. 5000. Now, the company distributing this dividend will deduct a TDS of Rs. 375 (7.5% of Rs. 5000). Further, this income will be taxed according to Mr. X’s income tax slab.

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