Investment is essential for wealth maximization. However, it is important for an individual investor to know the taxes and fees applicable on investments to maximize the returns.
The bottom line is that there are no tax exceptions for direct investments in shares or equity trading. Securities Transaction Tax (STT) is to be paid on every direct investment.
Securities Transaction Tax (STT)
STT is the tax on equity shares, which are traded at recognized stock exchange. The tax is implied on the shares which are listed on the stock exchange. Thus, stock exchange trading levies tax for the investors involved in the same. Moreover, it is absolutely necessary to hold demat account in order to perform the trading activity.
Taxes applicable on share trading
The income from trading can be classified as a capital gain or business income. The taxes applicable are in accordance with the same.
Capital gains can be further classified as long-term and short-term basis duration.
• Long-term capital gain
The investments soldafter a period of 12 months are exempted from income tax. However, it is subject to trading in India. Foreign trade performed is not under the purview of the exemption. Also, any loss on investments cannot be carried forward and is a dead loss.
• Short-term capital gain
Gains from shares sold within a period of 12 months are taxable at the rate of 15%. Short-term capital loss can be set off against the short-term capital gain.
Income classified as business income can be further divided into two categories on the basis of frequent trading and returned reaped through it.
• Speculative business income
Investors performing intra-day trading fall under this category. Taxation is similar to business tax as per the tax slabs, and the losses can be set off against the speculative gains.
• Non-speculative business income
Trading in Futures and Options on recognized exchanges fall under this category. Taxation again, in this case is similar to business tax, depending on the tax slab the investor falls in. The loss can be set off against the gains or profit.
Many investors face difficulties in classifying theabove trading income undercapital gains or as business income. If the trading is primarily delivery based, it should be classified under capital gains rather than business income. Thus, it is important for an investor to take an informed decision, on the basis of a consultation with an expert or accountant, to ascertain appropriate treatment of taxes.
Strategies for tax savings
Strategy in investment as per the profit goals always plays a key role for an investor. Thus, it is essential for investors to plan for the investments in order to maximize profits. There are a number of points, which if the investor is aware of, can help him in saving a huge sum of money. Some of them have been highlighted below:
• Dividend income is a tax-free income. The company has already paid dividend distribution tax on behalf of the shareholder. Thus, an investor is not required to pay tax of 15% on the dividend income received.
• The dividend distribution tax is paid by the organization distributing the dividends, thus the investors are not liable to pay any tax on the dividend income. This helps an investor to save money.
• Trading-related expenses can be deducted from the income while filing tax, in case the individual classifies his income as business income.
• Expenses like telephone bill, the Internet charges, brokerage,and other similar expenses incurred while trading can be deducted from the income. Also, if there are losses they can be set off against the income. This provision helps in savings for an investor.
• Short-term capital loss can be set off against short-term capital gain. This does not hold true in case of long-term capital losses. There is no provision in the rule to set-off long-term capital loss.
For instances, an investor holds a short-term capital gain of 100,000 and short-term loss of 10,000, also long-term capital loss of 45,000. In this case, 10,000 can be set off against the 100,000 taxable profits. However, 45,000 is an un-recoverable or dead loss.
Taxation is an important aspect while dealing with investment, either on a long-term or short-term basis. Thus, it is important for investors to understand the tax rule, which would play an important aspect while making an investment. A well-planned investment is always a profitable decision.