The stock gains that you earn needs to be mentioned while filing the income tax returns. Furthermore, the tax implications on stock investments can vary based on various factors.
If you want to know how your investment in the stock market is taxed, then read this article.
Understanding tax implications on stock market investments is crucial for every investor. As there are various factors considered while calculating taxes, it can be difficult for people to understand how their investment plan is taxed.
Tax Implications Based on Time Factor
Tax implications based on time factor is divided into two categories-
- Short-Term Gains
If gains are received by trading stocks that were held for less than a year, then such gains are considered short-term gains. Capital gains tax will be levied on such gains. Short-term capital gains are taxed at 15% of the profit.
- Long-Term Gains
Long-term gains are the profits earned by trading stocks that were held for more than a year. These gains are taxed at 10%.
Tax Implications Based on Job Factor
Tax implications for people trading in the stock market on a part-time basis will be different compared to those trading full-time.
People trading full-time as the owner of a company or in a partnership can be treated as full-time traders. The income from such trading activities can be considered speculative business income.
Regular income generated via stock trading activities is treated as speculative business income. Furthermore, profits earned by trading stocks with short terms are treated as speculative business income.
For people who have another full-time income source or business and are trading in stocks on a part-time basis, stock trading can be considered an investment. The income earned can be considered business income.
Tax Implications on Dividend Income
Dividends are considered ‘income from other sources’. Therefore, dividends are taxed as per the applicable income tax rates.
Tax Implications on Bonds, Debentures, and Mutual Funds
Short-Term Capital Gains Tax-
Short-term capital gains tax will be levied if they are sold before 36 months of purchase. Normal tax rates will be applied on such gains. Losses can be carried forward up to 8 years.
Long-Term Capital Gains Tax-
Long-term capital gains tax will be levied if the securities, debentures, mutual funds, and/or bonds are sold after 36 months of purchase.
Tax Implications on Derivatives, Currency, and Commodities
The income from derivatives, currency, and commodities is considered non-speculative business income. It is taxed as per normal slab rates.
Tax Implications on Share Buy-Back by Listed Companies
In case Indian listed companies carry out share buy-back, the proceeds received by the shareholder are exempt from income tax. This is because the tax levied on the share buy-back is paid by the listed company.
Tax Implications on Unlisted Shares
In case of unlisted shares, gains are considered long-term if they were held for more than 2 years. Gains earned from unlisted shares sold after holding them for less than 2 years are considered short-term capital gains.
Short-term capital gains will be taxed as per the applicable marginal rate of the investor. Long-term capital gains are taxed at 20%, and the taxpayer becomes eligible to claim the benefit of indexation on long-term capital gains.