Well, Albert Einstein wasn’t wrong when he said, “The hardest thing in the world to understand is the income tax.” Copy that. Income tax is fiddly… about 300 sections, categorised into subsections, containing numerous case laws, provisions and clauses, further divided into sub-clauses and the list goes on. Unless you’re one amongst those wise tax professionals, information about all this stuff could put you at your wits’ end, let alone interpreting it. No wonder why year-end is a nightmare for most Anyway, ignorance is not bliss, not anymore. There are some basics that everyone should know about the income tax. Especially if you’re into equity investing, here’re the various taxes you need to be informed about:

  • Income Tax on Capital Gains
  • Income Tax on Dividend
  • Securities Transaction Tax (STT)
  • Goods and Services Tax (GST) on brokerage

You’d be better off knowing about these taxes. Because that way, you can filter your alternatives with precision and opt for the best stock broker, which of course, is your first baby step towards the stock market.

So, without further ado, let’s discuss.

Capital Gains tax

Capital Gains is the profit you earn when you sell a security at a price higher than you acquired it for. For instance, if you had bought 10 shares of A ltd at Rs 100 each and sold them after some months at Rs 150 each, then your capital gains will be Rs 500 [(150-100)*10]. Had you not sold those investments, capital gains would not have arised. And naturally, the government will want a pie of the gains you made, and that’s the Income tax on capital gains.

Based on the holding period, capital gains are categorized into two types —

  1. Short-term capital gains
  2. Long-term capital gains

And the tax rates also differ for both these categories.

If the shares are held for less than 12 months, any gains earned on these transactions are considered to be Short-term capital gains. These gains are subject to a tax of 15%.

Any gains on shares held for more than 12 months are considered to be Long-term capital gains. If you’ve paid STT on those transactions, these gains are subject to a tax of 10%. And if you haven’t paid STT, it’ll be taxed @ 20%.

However, long-term capital gains upto Rs 1 Lakh in a single financial year are exempt from tax, without any benefit of indexation.

Dividend tax

Dividend received from an Indian company was exempt until 31 March 2020. That was because the company declaring such dividend had already paid the Dividend Distribution Tax (DDT) before making payment.

However, the Finance Act, 2020 changed the method of dividend taxation. The DDT has been abolished. Similarly, the tax of 10% on dividend receipts of resident individuals, HUF and firms in excess of Rs 10 lakh, also stands withdrawn.

Henceforth, all dividends received on or after 1 April 2020 are taxable in the hands of the shareholder at normal rates as applicable (whether it’s treated as a business income or other sources).

Securities Transaction Tax (STT)

You must pay the STT every time you buy or sell securities. It is levied on transactions involving three investment instruments – stocks, derivatives and equity mutual funds. Your broker will automatically deduct the STT every time you trade in these instruments.

The STT rate varies as per the transaction. It is generally mentioned in the contract note that your broker gives you upon the execution of the trade. For delivery-based equity transactions, it is 0.1% of the transacted value. For instance, if you buy or sell securities worth Rs.1 lakh, you will be charged Rs.100 as STT. Simple.

Goods and Services Tax (GST)

Often when people hear about GST in equity transactions, they fail to digest it, as equity is beyond the ambit of GST. However, here’s the catch… a broker does facilitate your equity transactions, right? And does he do it for free? No business sense in that! Brokers charge you brokerage fees and that’s where GST creeps in.

Thus, GST @ 18% is charged on the brokerage fees (including the exchange charges) that you pay to your broker for executing your trade. Suppose you buy stocks worth Rs 1 Lakh, and your broker charges 0.02% as fees and exchange fees of Rs 3. So, you’ll pay a brokerage and exchange fees of about Rs 23. So, the GST will come out to be about Rs 4.14.

Anyway, it must have been clear to you that GST largely depends upon the brokerage and other costs that you’ll pay to execute the trade. Hence it’s imperative that you calculate the brokerage charges before you jump into any transaction.

The bottom line

Irrefutably, charges and taxes have a very crucial role to play in investment decision making. They can influence the investor to reconsider his/her bet. A yes can be a pass once these costs unravel. Hence, it would be mere stupidity to ignore these variables while investing. And now you know why these charges are of utmost importance in the stock markets.

Thus, everyone investing in the stock markets or planning to invest in the stock markets must be aware of these costs. But how can someone who hasn’t yet put his foot in the stock markets discover about this, you ask? Is it possible to do this even before opening a demat account? Hell yeah.

You can now compare all the registered stock brokers and their charges even before opening a demat account at India’s leading broker comparison tool. What’s more is that you can also get a step-by-step guide to demat account opening and proceed with the same, and all of this only at Select by Finology.

So, wait for what?


Disclaimer: The contents of this article are for information purposes only and do not constitute an advice or a legal opinion and are personal views of the author. It is based upon relevant law and/or facts available at that point of time and prepared with due accuracy & reliability. Readers are requested to check and refer relevant provisions of statute, latest judicial pronouncements, circulars, clarifications etc before acting on the basis of the above write up.  The possibility of other views on the subject matter cannot be ruled out. By the use of the said information, you agree that Author / TaxGuru is not responsible or liable in any manner for the authenticity, accuracy, completeness, errors or any kind of omissions in this piece of information for any action taken thereof. This is not any kind of advertisement or solicitation of work by a professional.

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    long-term capital gains upto Rs 1 Lakh in a single financial year are exempt from tax, without any benefit of indexation. GRAND FATHERING IS PERMISSIBLE?

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June 2021