Taxes You Have to Pay When You Invest in Stocks

What Is the Tax Treatment of Domestic Equity Stocks?

The holding time is used to classify long-term and short-term capital gains from selling listed equity shares in India. The term "holding period" refers to how long an investor keeps their shares in their possession, i.e., from the time of purchase to the time of selling.

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What Does Equity-Oriented Mutual Funds' Tax Treatment Look Like?

The capital gain from the sale is either long-term or short-term, depending on the length of holding such units. The same rules apply to capital gains from equity-oriented mutual funds to capital gains from listed domestic equity shares.

Capital gains, both long and short term: The holding time for long-term and short-term capital gains remains 12 months in mutual funds.

Dividends: Dividends from equity-oriented mutual funds are taxed similarly to dividends from domestic equity shares.

Also read: How To Save Tax Under Section 80C

What Are the Taxes on Foreign Equity Shares?

For taxation in India, investments in overseas shares are regarded the same as investments in unlisted shares. Residents of India can invest in equities listed on international stock exchanges under the Reserve Bank of India's (RBI) Liberalized Remittance Scheme (LRS), which allows investors to invest up to INR 18.75 million each financial year.

Long-term and short-term capital gains: If an investor holds foreign shares for more than 24 months, the gains are considered long-term; otherwise, the gains are considered short-term. Long-term capital gains are taxable at a rate of 20%, whereas short-term capital gains are taxed at the investor's slab rate.

Dividends: Dividends from overseas stocks are taxed at the standard rates as 'income from other sources.'

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How Does the Securities Transaction Tax (STT) Work?

The Securities and Exchange Commission Act's Sections 111A and 112A apply to stock exchange transactions. If a transaction is not subject to STT for any reason, it is taxed under Section 112 of the Information Technology Act. According to Section 112 of the IT Act, the investor has the option of being taxed at 20% (with indexation) or 10% (without indexation), whichever is higher.

What Are the Taxes on Debt Instruments?

Debt instruments are fixed-income securities in which debtors must pay the investors interest and principal. Debt mutual funds are a pooled investment vehicle that focuses on debt securities.

Corporate debentures, bonds, government securities (G-Secs), and debt-oriented mutual funds are all instances of debt instruments.

The following is the tax treatment of debt instrument income in the form of the capital gain on sale or redemption and interest income:

What Are The Taxes On Debt Mutual Funds, Debt ETFs, And Gold ETFs?

The tax treatment of debt mutual funds, debt ETFs, and gold ETFs are also based on how long they have been held. The term holding refers to when an investor holds the units of a mutual debt fund or ETF, i.e., from the date of purchase to the date of sale or redemption of those units.

Long-term and short-term capital gains: If you keep a mutual debt fund for less than 36 months, the gains are short-term; otherwise, they are long-term.

The short-term capital gains tax rate is based on the investor's tax slab. Short-term capital gains are taxed at the investor's applicable tax slab rate. Section 112 of the Internal Revenue Code taxes long-term capital gains at a rate of 20%. When computing long-term capital gains tax, the investor can benefit from indexation.

Also read: 10 Income Tax Planning Tips for Salaried Employees

What are the Derivative Instruments Taxes?

Derivative instruments are financial products whose value is determined by one or more underlying assets, such as commodities, currencies, metals, and bonds. Gains from derivative instruments are typically in the form of business income or other sources of income.

Transactions of trading in derivatives carried out on a registered stock exchange are not classified as speculative, according to Section 43(5) of the IT Act. Capital gains from derivative instruments are taxed at the slab rates applicable to such individuals because they are like the business or other forms of income.

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