Income Tax Implications on Demat Account Transactions

Introduction

If you're looking for investment options to grow your wealth, one way to do so is to invest in the stock market with the help of stock market app. For that, you need to have a Demat account and a trading account to store your securities and transact on the stock market. So while you get the opportunity of building your investment corpus in stocks and bonds, let us get to understand the tax implications applicable to your Demat account.

Additional Read: Income Tax vs. Capital Gains Tax: What is the Difference?

Tax on Returns in the Short Run

When you hold an asset for 12 months or less, it is regarded as a short-term capital asset. These investment assets could include mutual funds, equity shares, government securities, debentures, bonds, preference shares, and others. On selling short-term capital assets from your Demat account, within the stipulated period of one year or under 12 months, the gains you make from the sale are termed as Short-Term Capital Gains [STCG] that are taxed. You are automatically liable to pay STCG at 15% on gains where the Securities Transaction Tax [STT] is applicable. In cases where the STT does not apply, the STCG is added along with your total taxable income and is taxed based on your Income Tax Slab.

Tax on Returns in the Long Run

When you hold capital assets such as equity shares, mutual funds, government securities, debentures, bonds, preference shares, and others for more than 12 months, they are regarded as long-term capital assets. According to the Income Tax Act, 1961, the gains you make on selling long-term capital assets are termed Long-Term Capital Gains [LTCG].

When you sell any of the above-mentioned long-term capital assets from your Demat account, you are required to pay income tax on the Demat account according to LTCG. Currently, LTCG of up to ₹1 lakh is wholly exempt from taxation in a given financial year. LTCG over and above ₹1 lakh attracts tax at 10% in a financial year.

Additional Read: Get to know the 7 best tax-saving options available to you!

Additional Read: What is Tax Liability?

Tax on Losses in the Short Term

Suppose you have to sell your short-term capital assets at a price lower than your purchase price, then you incur a capital loss, which is classified as a short-term capital loss. According to the Income Tax Act, you can offset the short-term capital loss in the same financial year. However, if you are unable to offset your short-term losses in the same financial year, you have a provision of carrying forward the loss for a maximum of eight financial years.

Tax on Losses in the Long Run

If you sell your long-term capital assets at a cost below your purchase price, you will incur a long-term capital loss. According to the Income Tax Act, you can offset the long-term capital loss against long-term capital gains on all transfers made after 1 April 2018.

Just like for short-term capital loss, you can also carry forward your long-term capital loss for up to eight years. However, it would help to know that taking forward long-term capital loss can be only used to offset long-term capital gains made during the financial year.

Additional Read: Taxation on Equity Investments

What are the Taxes Associated with Demat Account Transactions | ICICI Direct

Ways to Save Tax through your Demat Account

There are two popular ways to significantly bring down your tax on Demat account liability.

If you're looking to claim a tax deduction and grow your wealth over a long period, you can choose from investing in an Equity-Linked Savings Scheme [ELSS] in a mutual fund or a Unit-Linked Investment Plan [ULIP]. Both these investment options allow you to save up to ₹1.5 lakh in a financial year.

The long-term capital gains on your ELSS investments will only be taxed if it exceeds ₹1 lakh. On the other hand, the majority amount of your ULIP investment is tax-exempt. 

Additional read: What you need to know about Income Tax in India

Additional Read: Tax-saving options beyond Section 80C

Conclusion 

Knowing how investments in your Demat account are taxed can allow you to make the right decision when selling your electronic assets. Opening a Demat account can help you store all your electronic investments in one place and streamline your taxation process.

Additional Read: Features and benefits of a Demat Account

Additional Read: How to Transfer Shares from one Demat Account to another?

FAQs:

   1.  How much tax do I pay on shares transactions in Demat?

The capital gains you earn from selling shares can be long-term (more than 12 months) or short-term (not more than 12 months), depending on your holding period before the sale. These gains are taxable as per the IT Act.

• STCG

You will be taxed at 15% for short-term capital gains when the Securities Transaction Tax [STT] is applicable. If STT does not apply, the STCG is added along with your taxable income and taxed based on your Income Tax Slab.

• LTCG

You will be fully exempt if your long-term capital gains are up to ₹ 1 lakh in a given financial year. IF they exceed above ₹ 1 lakh, you will be taxed at 10% and applicable cess.

   2.  How do I save paying taxes when I sell stock?

You are fully exempt from taxes if your long-term capital gains are up to ₹ 1 lakh in a given financial year. You can take advantage of this exemption to avoid or reduce paying taxes when your sell stock. Deploy the following investment strategy,

Book long-term gains up to ₹ 1 lakh annually by selling shares. Reinvest these gains in buying shares. Thus, the gains are the new acquisition cost. Repeat this process every year for optimally utilizing ₹ 1 lakh LTCG exemption. You will save 10% on ₹ 1 lakh each year, that is, taxes of up to ₹10,000 annually.

   3.  Do I have to pay tax on shares if I sell and reinvest with Demat?

Yes, you have to pay tax on shares if you sell and reinvest with Demat. Reinvestment does not take away your tax liability. But, you can enjoy exemption from taxes if your long-term capital gains are up to ₹ 1 lakh. So, if you book the LTCG of up to ₹ 1 lakh and reinvest with Demat, you could save up to ₹10,000 annually on taxes. Hence, increasing your holding period to a minimum of a year is a strategy you would follow to take advantage of the LTCG tax exemption clause and reduce your taxability.

Disclaimer

ICICI Securities Ltd. (I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Centre, H. T. Parekh Marg, Churchgate, Mumbai - 400020, India, Tel No: 022 - 2288 2460, 022 - 2288 2470. AMFI Regn. No.: ARN-0845. We are distributors for Mutual funds. Mutual Fund Investments are subject to market risks, read all scheme-related documents carefully. Please note, Mutual Fund related services are not Exchange-traded products and I-Sec is just acting as a distributor to solicit these products. All disputes concerning the distribution activity, would not have access to Exchange Iinvestor redressal forum or Arbitration mechanism. The contents herein above shall not be considered as an invitation or persuasion to trade or invest. I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. The contents herein mentioned are solely for informational and educational purposes.