Taxation for investors explained
People often come to this stage once they enter the equity markets. Let us have a look at the taxation system in India for investors and traders with examples.
Taxation for Investors:
You can consider yourself an investor when –
Buying and selling stocks after taking delivery to your DEMAT account :
If the frequency of transactions (buy/sells) is high, it is best to consider them as trades and not investments. If considered as trades, any income is non-speculative business income, whereas if these are investments, then it falls under capital gains. So essentially, stocks that you hold for more than one year can be considered as investments as you would have most likely received some dividends and also held for a longish time. Shorter-term equity delivery buy/sell can be considered as investments as long as the frequency of such buy/sell is low.
Long term Capital gains:
For stocks/equity – 0 per cent for the first Rs one lakh and 10 per cent after exceeding that limit.
Equity delivery based investments where the holding period is more than one year is defined, are subject to long term capital gains. For stocks/equity – 0 per cent for the first Rs one lakh and 10 per cent exceeding a profit of Rs one lakh
The above taxation rate is only applicable if the transactions (buy/sell) are executed on recognized stock exchanges where STT (Security Transaction Tax) is paid. As discussed above, LTCG is a holding period of more than a year.
If the transactions (buy/sell) are executed through off-market transfer (where shares are transferred from one person to another via delivery instruction booklet and not through a recognized exchange by paying STT), then LTCG is 20 per cent in case of both listed and non-listed stocks (Listed are those which trade on recognized exchanges). Do note that when you carry an off-market transaction Security Transaction Tax (STT) is not paid, but you end up paying higher capital gains tax.
Short term Capital gains:
For stocks/equity: 15 per cent of the gain
It is 15 per cent of the gain if the transactions (buy/sell) are executed on recognized stock exchanges where STT (Security Transaction Tax) is paid. STCG is applicable for a holding period over one day and less than 12 months.
If the transactions (buy/sell) are executed via off-market transfer (where shares are transferred from one person to another via delivery instruction booklet and not on the exchange) where STT is not paid, STCG will be taxable as per your applicable tax slab rate. Also, STCG is applicable only when the income exceeds the minimum tax slab of Rs 2.5 lakh per year. So if there is no other income for the year and assuming there was Rs one lakh STCG, it would not entail the flat 15 per cent tax.
Days of Holding:
For an investor, the taxation difference between LTCG and STCG is quite huge. If you sold stocks 360 days from when you had bought, you would have to pay 15 per cent of all gains as taxes on STCG. The same stock, if held for five more days (one year or 365 days), the entire gains would be exempt from taxation as it would be considered LTCG now.
It becomes imperative that you as an investor keep an eye on the number of days since you purchased your stock holdings. If you have purchased the same stock multiple times during the holding period, then the period will be determined using FIFO (First in First out) method.
Here is the explanation
Assume that on May 10, 2014, you bought 100 shares of Reliance at Rs 800 per share, and on July 1, 2014, another 100 shares were bought at Rs 820 per share.
A year later, on June 1, 2015, you sold 150 shares at 920.
Following FIFO guidelines, 100 shares bought on May 10, 2014, and 50 shares from the 100 bought on July 1, 2014, should be considered as being sold.
Hence, for shares bought on May 10, 2014 gains = Rs 120 (920-800) x 100 = Rs 12,000/- (LTCG and hence 0 tax) and for shares bought on July 1st, Gain = Rs 100 (920-820) x 50 = Rs 5,000/- (STCG and hence 15 per cent tax).