Taxation on Stocks in India: Short-Term, Long-Term, and Dividends
When you purchase any company’s stocks, taxes play a major role in the same. It’s much more than just buying cheap and selling high in the market.
For example, big Indian ventures recently handed out over ₹40,000 crore in profits to their owners.
Additionally, the government has revised the tax to 12.5% on profits from shares you hold for a long time.
So, let’s explore the process of taxation that applies when you sell the stocks early, hold them for a longer time, or receive cash payouts (dividends).
Short-Term Capital Gains
If you sell shares within 12 months of the purchase date, the profit will be considered as a short-term gain.
The tax rules and rates for STCG are simple, as you need to pay 15% tax on the profit, irrespective of your personal income tax slab.
How STCG Is Calculated
To calculate the STCG (short-term profits), you need to subtract the buying price from the selling price. Further, you need to subtract the brokerage charges.
Although these fees reduce the overall profit, you can’t subtract the Securities Transaction Tax (STT) that you pay when trading.
Long-Term Capital Gains (LTCG Shares Held Over 12 Months)
If you sell shares that you’ve been holding for more than one year, the profit is considered a long-term gain.
The first 1 lakh of your total long-term profit is tax-free every year. Any profit amount above 1 lakh rupees will be taxable at a flat rate of 10%.
How FIFO Decides STCG or LTCG
The tax system uses the First In, First Out (FIFO) rule to decide STCG or LTCG. In simple words, the oldest shares purchased will be considered as the ones you sold first.
Even if you plan to sell your new shares, this rule will be applicable in deciding whether the profit is short-term or long-term.
When You Buy the Same Stock Multiple Times
When you buy the same stock at different times, every purchase date is different for the tax rules.
While selling the shares, some may be short-term or long-term. It can help you gain both types of profits (STCG and LTCG) from a single sale.
Taxation on Dividends
Dividends are the money that the company pays you and fall under the tax rules. This amount will be added to your annual income and will be treated as personal income tax.
TDS on Dividends Above 5,000 Rupees
The money you get from dividends also has a tax rule. In case one company pays more than 5,000 rupees in a financial year, 10% of TDS will be automatically deducted before coming to you. The deducted TDS can be seen on the document known as Form 26AS.
If your personal tax slab is higher than 10%, you need to pay the small extra difference while filing the taxes. On the other hand, if the personal tax slab is lower than 10%, you can claim the extra money as a refund.
How Stock Losses Can Be Used
It’s surprising that losing money on a stock can help in lowering your tax bills.
A short-term loss (quick sale) can be helpful to lower both long-term and short-term profits.
Similarly, a long-term loss (long-term hold) can only be helpful in lowering long-term profits instead of short-term profits.
Using Your Losses in Future Years
The money you lose on stocks doesn’t just vanish right away. If you submit your tax return (ITR) on time, the losses can be used for the next 8 years.
This is an excellent choice to use the old losses to reduce taxes and make profits. It is helpful in case you’ve not made any profits in the current year.
Conclusion
Hence, taxes on stocks aren’t confusing if you have the right knowledge and insights. Some key things to know are how long to hold a stock, how the FIFO rule works, dividend money rules, and investment losses.
The most important step is to keep a keen eye on the exact dates of purchase and sale of stocks. Also, maintain a track of dividends, profits, losses, etc.
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This analysis is for informational purposes only. Please consult a SEBI-registered financial advisor before investing.
– Chandan Pathak
Equity Research Analyst, StockYaari