What are the Income tax implications on Demat Account?

If you are looking to grow your wealth in the long run, investing in the stock market is the way to go. Although it comes with higher risks, it can also fetch you higher returns as compared to traditional investment options in the next 10 to 15 years if invested wisely. For this purpose, you will need to open a Demat account . It is an electronic account that holds your shares just like your bank account holds your money.

It is mandatory to open a Demat account in India if you want to invest in shares, bonds, securities, mutual funds etc. However, it is important to note that any profits booked by you by selling shares in your Demat account are liable to be taxed. That is why you need to be aware of tax implications on your Demat account according to the provisions of the Income Tax Act 1961. Let us a look at a few aspects of taxation that you should be mindful of:

Tax on gains made in the short term

If you sell an asset for more than what you purchased it for, it is referred to as a capital gain. This includes equity shares, debentures, bonds, mutual funds, government securities, preference shares etc. which can be held electronically by investors with a Demat account . Now if you sell either of these assets in a span of less than a year at a value more than their purchase price, the profit made by you falls under the category of short-term capital gain.

A flat 15% securities transaction tax (STT) applies on gains made on short-term capital assets as per the current Income Tax rules. In instances wherein STT does not apply, the capital gain made by you over the short-term is clubbed with your total taxable income. Further tax calculation is done as per the income tax slab that you fall under.

Tax on profits made over a longer term

A capital asset that you hold for a period of more than a year is classified as a long-term capital asset. A gain made by you on the sale of such a long-term capital asset is termed as long-term capital gain (LTCG). Just like tax on capital gains made over the short-term as explained above, longer term capital gains are also taxed as per Income Tax regulations.

S0, if you sell shares, bonds or mutual fund units in your Demat account held by you for more than 12 months and book a profit, you are liable to pay tax. Capital gains made over a longer duration to the tune of Rs 1 lakh for a financial year are exempted, however, a flat 10% tax applies on any gains over and above this amount.

Capital loss

Selling your capital assets at a lesser price than the price at which you purchased them leads to a loss of capital. Capital assets held by you for less than 12 months attract a short-term capital loss (STCL). Income Tax laws allow you to set off your capital loss incurred over short-term against the corresponding capital gains made in the financial year. You can also carry forward your STCL for a maximum of 8 financial years in the future, in the event that it is not settled in a particular year. This forwarded loss can be set off against either STCG or LTCG made by you during the year.

Loss of capital due to the sale of an asset after a year below the purchase price is classified as long-term capital loss. It was neither allowed to be set-off or be carried forward until February 2018 when an Income tax notification changed the taxation process. If you are an investor holding a Demat account in India and incur a long-term capital loss for a transfer made on or post April 1, 2018, you can set it off against long-term capital gains for that financial year. Similar to the STCL, long-term capital loss is also allowed to be forwarded for upto 8 years, which can then be settled only against the corresponding LTCG made by an investor during a particular year.

Conclusion

Now that you know how your investments in a Demat account can be taxed, you can take advantage of the benefits of operating the account while also being aware of taxation. If you want to claim tax deduction and increase your savings, you can consider investing in a Unit linked investment plan (ULIP) or Equity linked Savings scheme (ELSS) of a mutual fund.

Both of these can help you save upto Rs 1.5 lakh in a financial year. While maturity amount of a ULIP is also tax exempt, the long-term capital gains on ELSS funds are taxed only if they exceed Rs 1 lakh. If you do not have a demat account already, consider opening one. Choose an IIFL demat and Trading account which helps your earnings grow securely as you create wealth for your future.