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Do you invest in the stock markets? This is how your investments are taxed

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By Raghunathan Parthasarathy

Thanks to the technological upgrade and different zero brokerage platforms, access to the stock exchange has become convenient and simple. On this front, it is imperative to be familiar with the tax obligations associated with income earned from trading or investing in stocks and mutual funds.

Taxation of stocks and mutual fund : In addition to the profit or loss realized on the sale of stocks or mutual funds (called sales income), these instruments may pay dividends. Taxing sales income and dividends works differently. In addition, the taxation of sales income depends on the frequency / amount of the sale made by the investor.

Taxation of dividend income: It’s simple. Dividends are generally classified as income from other sources “and are taxed at applicable tax rates. The company paying dividends will deduct tax at source and this varies depending on the type of investor.

Taxation of sales income:

(A) For active business investors, sales income falls under the category of trading income. “In cases where transactions are made without delivery, it is treated as speculative trading income.” Expenses such as broker commission, internet fees, demat account fees, etc. may be subtracted from earnings earned. In such cases, tax will be paid on net profit and a tax audit will need to be carried out if the volume of transactions exceeds 5 crore in a given fiscal year.

In the event of a loss, it can be adjusted against other sources of income (excluding salary). The excess loss can be carried forward and charged against the following year’s business income.

The loss for the year is allowed to be carried forward for eight years in the event of normal business loss and is limited to 4 years for speculative business loss and this adjustment also only with speculative business profits.

(B) For people who invest and do not actively trade, sales income is classified as capital gains (CG). The CG tax rate on the sale of mutual funds / shares varies depending on how long the instrument was held before the sale.

In the event of a loss on sale, it can be carried forward over 8 years and offset in the year of the gain.

Here’s how mutual funds and stocks are taxed

Taxation of mutual funds and stocks

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Taxation of mutual funds and stocks

* without indexation advantage beyond 1 lakh (the long-term CG exemption for listed shares / the equity-oriented MF has been withdrawn with effect from February 1, 2018)

Share buybacks by listed companies: When Indian listed companies make share repurchases, the proceeds received by the shareholder are exempt from income tax because the share buyback tax is paid by the listed company.

Another aspect: Equity exchange-traded funds (ETFs) are taxed the same as equity-focused mutual funds. The taxation of derivatives is not covered.

(The author is the Associate Partner – Tax and Regulatory Services, BDO India. The views expressed by the author are his own.)

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