Abhay is a married man looking to build a corpus for his life goals, mainly his retirement and his children’s education. He wants to invest in the stock market, mainly because it gives excellent returns over the long run. However, with the change in the tax laws on capital gains, he is confused about the tax impact.
Abhay is not the only one. Many investors stay out of the stock market because they’re not sure about taxation rules. However, the rules are simple and easy to follow.
Gains on the stock market are also subject to tax. This includes gains on shares as well as equity mutual funds. Any profit that you may have made from buying or selling shares and mutual funds are considered capital gains and hence taxable.
Capital gains can be either long term or short term. The taxability and rules for both these different types of gains is completely different.
Short term capital gains tax on equity
When a financial asset such as a share or a unit of a mutual fund is held for less than a year, the capital gain on such financial asset is short term in nature. Short-term capital gains are charged on both equity and equity funds.
Short-term capital gains are taxed at a rate of 15% irrespective of the tax slab of the person. However, if the income of the person is below the taxable limit, you don’t have to pay capital gains tax on amounts that are under this limit. For example, if the income from all sources is Rs. 1, 50,000 and there is a short-term capital gain of Rs. 30,000, there will be no tax charged on this gain. If the income from all other sources is Rs. 2, 20, 000 and a short-term capital gain of Rs. 50,000 is earned, capital gains tax will be charged on Rs. 20,000 since Rs. 30,000 capital gain is set off against the unutilized no tax limit.
Any short-term capital loss can be set off against both short-term and long-term capital gains. If there is no long-term or short-term capital gain available to set off the loss, it can be carried forward for the next eight years and can be set off against any gains earned in the future. However, this loss is allowed to be carried forward only if the income tax return is filed on time.
In contrast, debt mutual funds need to be held for more than 36 months to be considered as long term. Short-term capital gains on debt mutual funds are added to the income of the investor and taxed at regular slab rates.
Long term capital gains tax on shares
Debt mutual funds attracts a long term capital gain tax of 20% with indexation benefit. This means you pay lower tax, especially if you hold the investment for long periods.
Until 1st April 2018, long-term capital gains on shares and equity mutual funds were completely exempt from tax. However, amendments in the Budget of 2018 mean that you have to pay taxes on any long-term capital gain above Rs. 1,00,000 earned on the sale of equity shares or equity mutual funds. However, any gains earned before 1st February have been grandfathered, which means that you have to pay tax only on gains made after 31st January 2018.
One important point one needs to remember when it comes to income tax on shares. Any capital gains tax has to be paid in advance by 15th September, 15th December or 15th March. This amount needs to be paid completely in terms of advance tax. There is a section in the income tax returns which talks about payment made for any capital gains tax during the year; in the absence of such payment, interest is charged for late payment by the income tax department. It is best to use a short-term capital gains tax on shares calculator to find out how much gains you have made and the tax you need to pay in advance on such gain to avoid any problems.