In India, individuals and corporations pay income tax, which is a tax levied by the Union government on income received within a fiscal year. Taxes are one of the government's primary sources of revenue. The government uses this revenue to construct infrastructure, provide healthcare, education, and subsidies to farmers, the agriculture sector, and other government welfare programs. Direct taxes and indirect taxes are the two basic forms of taxes. Direct tax, for example, is a tax levied directly on earned income. Income tax is a form of direct taxation. The tax calculation is based on the income slab rates that were in effect at the time.
Many investors are unsure of the appropriate method for calculating their mutual fund taxes. The types of investments in your mutual fund's portfolio have a lot to do with how your mutual fund is taxed.
In some situations, where mutual fund distributions are taxed at the highest rate, they are categorised under Short term capital gains. For longer terms, they are under, lower capital gains tax rate while ordinary dividends are taxed at standard federal income tax rates. Other types of payouts such as dividend equity funds may be tax-free.
What is income tax from share trading?
Profits from stock investments are classified as capital assets under income tax regulations, and profits are taxed under the heading "Capital Gains." You are liable to pay the tax on such investments only when they are sold. As a result, there is no tax responsibility as long as the investment is not sold and the profits are not realised.
Furthermore, the requirement to file an ITR normally arises only when taxable income from all sources, including earnings on investments, exceeds the basic exemption threshold before other deductions and exemptions.
What is the capital gains tax on shares in India?
Capital Gains Tax
A capital gain is any profit or gains obtained as a result of the sale of a "capital asset." Since this falls under the category of "income," therefore, you must pay tax on it in the year when the capital asset is transferred. This is referred to as capital gains tax, and it can be either short-term or long-term in nature.
Capital gains tax on shares
- Any portion of the revenues from the sale of your mutual fund shares representing a return of your initial investment is not taxable because you already paid income taxes on the money when you earned it. As a result, it's critical to understand how to compute the portion of your income that can be ascribed to gains rather than investments.
- You must first know how much you paid for the liquidated shares to assess how much of your investment income is gain or loss. This is referred to as the foundation. Because mutual fund stocks usually appear on different dates, in different amounts and quantities at various prices, determining how much you spent for a particular share can be tricky.
- Only if total income from all sources, after numerous deductions, exceeds the basic exemption ceiling of Rs 2.50 lakh, then you are obligated to pay tax.
- Each taxpayer is entitled to an additional basic exemption of one lakh for profits made on listed shares that are sold on stock exchanges after one year, in addition to the basic exemption applicable. As a result, it should be evident that you do not need to worry about filing the ITR or paying taxes as long as you do not sell your stocks.
Also Read: Income Certificate Online- Procedure and Format
Taxable investment income
Short term capital gain tax
- The short-term capital gain tax rate is 15%.
- Regardless of your tax bracket, short-term capital gains are taxed at a special rate of 15%.
- You can also use short-term gains to offset the difference if your total taxable income, excluding short-term earnings, is less than Rs 2.5 lakh.
- The short-term gains which remain after taxable income will be taxed at a rate of 15% plus a 4% cess.
Long term capital gain tax
- In terms of long-term capital gains tax, stocks are tax-free up to 1 lakh rupees in value.
- Long-term capital gains amounting to more than 1 lakh rupees on the selling of equity shares or equity-oriented units of a mutual fund will be liable to a capital gains tax of 10%.
- The seller will forfeit the advantage indexation, as per budget 2018 amendments. Transfers conducted on or after April 1, 2018, fall under these rules.
Short-term capital losses
- Any short-term capital losses caused by the sale of shares can be offset by short-term or long-term returns on invested capital.
- If the loss is not totally balanced, it can be carried forward for an additional eight years and balanced against any short or long-term capital gains earned during that time.
- It is important to understand that anyone who pays taxes can only bring forward losses if they have filed their income tax return by the deadline.
As a result, even if the total annual income produced is less than the minimum taxable income, you must file an Income Tax Return to carry these losses forward.
Long term capital losses
- Until Budget 2018, long-term capital losses from equity shares were considered a "dead loss" that could not be rectified or carried forward. This is because long-term capital gains in publicly traded stocks are tax-free.
- They were also not allowed to be set off or carried forward for losses suffered due to them.
- The government has declared that any losses arising from listed equity shares, mutual funds, and other similar assets will be carried forward after modifying the law to tax earnings in excess of Rs 1 lakh at 10%.
- Long-term capital losses from transfers made on or after April 1, 2018, would be allowed to be set-off and carried forward in accordance with existing Act rules, according to the income tax department.
As an outcome, the long-term capital loss can be balanced against any other long-term capital gain. And the residual long-term capital loss can be carried forward for the next eight years to offset against long-term gains.
How are dividend payments taxed?
- In addition to sharing money generated from asset sales, mutual funds pay out dividends when their underlying assets produce money or pay interest.
- Profits from mutual funds must be distributed to shareholders because they are pass-through investments.
- When a fund owns dividend-paying stocks or bonds that pay a predetermined amount of interest each year, known as a coupon, this is the most usual scenario.
- Dividend income is often taxed as regular income. If your mutual fund often buys and sells dividend equities, any dividends you earn will almost certainly be taxed as regular income.
Securities Transaction Tax (STT)
STT applies to every equity share traded or purchased on the stock exchange. Only shares that are traded on a stock exchange are subject to the aforementioned tax consequences. STT applies to any stock exchange sale or purchase.
How to treat the sale of a business's stock as a source of income
Profits and losses from the sale of shares are treated differently by different taxpayers. Some classify them as "income from a business," while others treat them as "capital gains. It's been hotly debated whether capital gains or losses from stock sales should be taxed as company income or capital gains.
- If you have a lot of share trading activity, your income is normally classed as business income. In this situation, you must file an ITR-3, and your share trading income is reported under "income from business & profession”.
Calculating income from a business vs income from capital gains
- If you regard the sale of stock as a type of company revenue, you can deduct expenses incurred in producing it. The earnings would then be added to your total income for the fiscal year in this case, and tax slab rates would apply.
- If you regard your earned income as a capital gain, you can deduct the transfer costs. Long-term profits from stock that exceed 1 lakh rupees per year are also taxable. On the other hand, the tax rate on short-term gains is 15% as per new clarifications issued by the Central Board of Direct Taxes (CBDT).
- Taxpayers now have the option of how they choose to use this cash. They must use the same method in consecutive years unless the case's circumstances change significantly. Please keep in mind that this option is only available for shares or assets that are publicly traded. The CBDT published the following rules to reduce the number of legal cases:
- The Assessing Officer (AO) will not challenge the revenue if the taxpayer chooses to recognise it as capital gains. This applies to listed shares that have been held for longer than a year.
- The chosen process of the taxpayer will be applicable for the valuation of subsequent years. In future years, they will not be able to choose a different approach.
- In some cases, the transaction's nature will be determined by "substantial trading activity" and the taxpayer's intention of holding shares as "stock" or "investment.
- If you followed the preceding recommendations, Assessing Officers would be less inclined to question you about your income classification.
In this case, how should the capital gain on sale of shares that are not listed be handled?
The department has voiced its views on the sale of shares that are not listed and do not have a formal market for trading. Income resulting from the transfer of non-shares that are unlisted would be subject to taxation under the new law, regardless of the length of possession, to reduce disputes and maintain a consistent approach.
How to save tax on capital gains?
The capital gains tax on shares is calculated on the gains made from selling the shares and fair market value. You can save tax on capital gains by determining whether the shares were held for a longer or shorter period of time.
To avoid capital gains tax, make sure you keep them for at least a year. Another method of avoiding the capital gain tax is to use a tax harvesting approach. The strategy is to buy lengthy capital gains and reinvest the profit in the same mutual fund to sell the desired portion of the units you've held.
Without the benefit of indexation, Long-term capital gain (LTCG) of value above Rs 1 lakh would be taxed at a rate of 10%, whereas short-term capital gains (STCG) are taxed at 15%. To put it another way, you can reduce your LTCG and STCG tax responsibilities by harvesting tax losses.
Also Read: How To Save Income Tax on Income From Salary For Individuals
Conclusion
Even for the most seasoned investor, calculating the taxes you owe on mutual fund income and dividends may be quite complicated. However, unless you own a small number of shares and keep meticulous records, you may benefit from consulting a tax specialist to ensure that all of your investment income is appropriately reported. Keep these few pointers in mind :
- Mutual funds that generate many short-term capital gains and are taxed on ordinary income (rather than capital gains) can be expensive.
- The distinction between ordinary income and capital gains when it comes to payouts depends on how long the fund holds personal investments in its investment portfolio.
- If you get a dividend from a fund resulting from the sale of a security that the fund has held for less than six months, you will be taxed at your ordinary-income tax rate.
- However, if the fund retained the security for several years, the proceeds would be subject to capital gains tax.
We hope we have been able to convey adequate information regarding tax on shares through this article.
