Having a Demat account is a must if you want to start investing in shares, bonds, mutual funds, and many other financial securities since it is a must and offers a very easy way to manage your investments all at one place, digitally
However, it is important that you know about the tax implications of transactions which happen through a Demat account since any profits made from selling these securities are subject to taxation under the Income Tax Act of 1961. So let’s dig deep into understanding the details of these tax implications and what you can do about it.
Tax on Short-Term Gains
When you sell shares, debentures, bonds, or mutual funds within one year of acquiring them, any profit earned falls under short-term capital gains (STCG). This type of gain is usually subject to a flat 15% tax under the securities transaction tax (STT) provisions of the Income Tax Act.
If STT does not apply, your short-term capital gains are added to your total taxable income and taxed according to your income tax slab which makes it important to consider the best share market app to keep track of your gains and losses.
Tax on Long-Term Gains
If you hold a capital asset for a period of more than a year, any profit from its sale is classified as long-term capital gains (LTCG). According to the Income Tax regulations, LTCG exceeding Rs 1 lakh in a financial year attracts a flat 10% tax, while gains up to this threshold are exempt from taxation.
This rule applies to assets like shares, bonds, debentures, and mutual funds, and it’s important to keep track of these to manage your Demat account efficiently.
Capital Loss
Selling your assets at a price lower than their purchase cost results in a capital loss, which can be short-term or long-term depending on the holding period of the asset. Short-term capital loss (STCL) can be set off against short-term or long-term capital gains in the same financial year. If the STCL is not fully utilised, it can be carried forward for up to eight financial years which allows you to offset it against gains in subsequent years.
Long-term capital loss (LTCL), resulting from selling long-term assets below the purchase price, can be set off against LTCG. This rule was introduced in a February 2018 notification, and just like STCL, LTCL can be carried forward for up to eight years which makes it important to use the best share market app to keep track of these losses and gains.
Tax Saving Strategies
You should understand the details of these tax implications and understand some strategies along with it which can help with minimising your tax liability significantly, so let’s take a look at some of these effective strategies:
Investment in ULIPs:
Unit Linked Insurance Plans (ULIPs) combine insurance coverage with investment opportunities. Investments in ULIPs up to ₹1.5 lakhs in a financial year are exempt from taxation under Section 80C of the Income Tax Act. Additionally, the maturity proceeds are also tax-exempt which makes ULIPs an attractive option for tax-saving while managing your Demat account.
Investment in ELSS:
Equity Linked Savings Scheme (ELSS) is another tax-efficient investment option with a lock-in period of just three years. ELSS investments up to ₹1.5 lakhs in a financial year qualify for tax exemption under Section 80C. The long-term capital gains from ELSS are taxable only if they exceed ₹1 lakh which offers a significant tax-saving opportunity.
Setting Off Capital Losses:
By strategically setting off your short-term and long-term capital losses against corresponding gains, you can reduce your taxable income. This strategy requires careful planning and tracking of your investments which makes it beneficial to use the best share market app to monitor your portfolio.
Investing for the Long Term:
When you hold your investment for a period of more than a year, it can usually help you benefit from a generally lower tax rate on long-term capital gains. This approach not only offers potential tax savings but also matches the principle of long-term wealth creation.
Utilising Margin Trading:
Margin trading lets you borrow funds to invest in the stock market which can potentially increase your returns. However, it’s important to be aware of the tax implications of the gains made through margin trading. Effectively managing your margin trading activities can help you optimise your tax liability properly
Conclusion
You should always be aware of the tax implications on transactions in the Demat account since it is very important for any investor to think about maximising their returns and reducing any tax liabilities that you can. Understanding the rules around short-term and long-term capital gains, capital losses, and various tax-saving strategies can help you make proper investment decisions and help with better management of your financial portfolio.
Platforms like HDFC SKY provide proper comprehensive solutions which include investment resources, portfolio management tools, and advanced trading features, to help investors navigate the complexities of the stock market. Using tools like HDFC SKY and staying informed about tax regulations can help you optimise your investment strategies and achieve your financial goals with greater ease.
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