Most of us might know that income from salary, rental income, and business income is taxed. But did you know that your investments in shares are also taxed? With the internet, stock market investments have become easier and more accessible.
This is why everyone needs to know about the taxes involved in their investments in the stock market. So, let us talk about taxation rules when you sell your shares. Before we discuss the topic, let’s understand the types of income generated from selling shares.
Types of Income Generated From Selling Shares
When it comes to selling shares, investors will receive different types of income, and each of them is taxed differently. The primary types of income generated are:
A. Capital Gains
1. (LTCG) Long Term Capital Gains
2. (STCG) Short Term Capital Gains
Capital gains are generated when an investor sells the shares at a higher price than the purchase price. These gains can again be classified into long term and short term capital gains depending on the duration for which the shares were held with an investor before the sale.
Long term capital gains happen when you are holding a share for more than a period of 12 months. It typically means one year. Here, when you sell the shares after holding it for that period, it will be known as long term capital gains.
Short term capital gains on the other hand is when a share is held for less than a period of 12 months and then sold off.
So, your income from selling shares can either be long term or short term. Based on these two time spans, the taxes will be assigned on your investment.
B. Dividend Income
Dividend income is generated when companies earn profits and distribute them to the shareholders in the form of dividends. This income is taxed differently from capital gains and may be subject to dividend distribution tax (DDT).
Taxation of Income Earned From Selling Shares
Long Term Capital Gains: Before 2018, the long-term capital gain made on the sale of equity shares was exempt from tax, that means no tax was levied on gains from the sale of long term equity investments.
However, this exemption was taken away in 2018. Now (transfers made on or after 1 April 2018.), if a seller makes a long-term capital gain of more than Rs.1 lakh on the sale of equity shares, the gain made will have a long-term capital gains tax of 10% (plus applicable cess).
Short Term Capital Gains: If equity shares listed on a stock exchange are sold less than 12 months of purchase, the seller may make a short-term capital gain or incur a short-term capital loss. Short-term capital gains are taxable at 15%.
You can calculate your short term capital gains by subtracting the purchase price and expenses on sale from the sale price. You can use the below formula or use an income tax calculator to stimate their tax liability on capital gains accurately.
Short-term capital gain = Sale price (SP) minus Expenses on Sale minus the Purchase price.
The Several Tax Considerations You Need to Make When Investing in the Stock Market
These considerations would be helpful for you to look into as they might help you in making proper decisions which can eliminate the necessity of facing certain hardships when investing in the stock market:
● If the equity shares are set up for less than twelve months, then the capital gains will be taxed at a rate of 15%, which is higher than the taxes of long term capital gains.
● It is beneficial to open a Demat account in the name of the HUF (if you are one), as the Income Tax Act of 1961 refers to HUFs as a separate legal organization. The estimation of the HUFs is done separately. The primary exemption limit is 2,50,000.
● The long-term capital loss experienced throughout a financial year will be able to set off hostile to the long-term capital gains for the different financial years.
● The long-term capital gains on the sale of the equity shares were entirely exempted before the 2018 union budget. However, the tax at the rate of 10% was levied on such gains after the 1st of April 2018.
● Suppose the equity shares are held for more than 12 months, and then the long-term capital gains to Rs. 1,00,000 or less; the tax would be collected at 10% with an indexation benefit. If the amount crosses 1 lakh, there will be no indexation benefit.
Conclusion
If you are an active investor in shares, understanding the taxation of income earned from selling shares is very important in order to manage your tax liabilities and maximize returns. By familiarizing yourself with the tax rules regarding capital gains and utilizing tools like an income tax calculator, you can make informed decisions about when to buy or sell shares and strategize your investment approaches accordingly.