Taxes On Investments

Are you considering these tax provisions before investing in stock market? You should.

Tax is a major factor when it comes to making investment decisions. In fact, many invest in certain funds just to ensure a lower tax liability.

When it comes to investment in equity markets or equity oriented mutual funds, the tax can get a little complicated. Why? Because you can have two sources of income from investing in stocks - dividends and profits.

This article will attempt to improve your understanding of the tax matters associated with investments in equities.

So, without any further delay, let’s dig right into it.

  Tax on Equity Investments and  Equity Oriented Mutual Funds :

    The equity market is one of the most lucrative avenues for investment. This is mainly because of its potential to give you high returns. 

That’s the biggest reason why so many want to buy shares. But then making up your mind about which company’s stock to buy can be a daunting task. Add to that the tax implications on the dividend income and gains.

Let’s break them down.

Dividends :

You don’t have to pay taxes on your dividend income, provided the company that paid you this dividend is an Indian company and has paid the Dividend Distribution Tax. This is clearly clarified under section 10(34) of the Income Tax Act, 1961.

However, if the Dividend Distribution Tax isn’t paid by the company, then the entire dividend amount will be added to your total income and get taxed under the tax slab your income falls.

The tax rate on Sale of Shares :

All gains from the sale of equity shares come under the head Income from Capital Gains. This head divides the term of holding the asset into short-term and long-term.

In case of equity shares, if you have held the shares for 12 months or above, it’s classified as long-term investment. Otherwise, it’s considered as a short-term investment.

Now for the tax effect. It depends on whether your gain is a short-term gain or a long-term gain, whether it’s trading at a recognized stock exchange and whether Securities Transaction Tax has been paid on it.

Short-Term Gain :

●     Taxable @ 15% (plus surcharge and cess as applicable) 

○     Securities Transaction Tax is paid on purchase and sale of the equity shares, and,

○     The shares are trading in a recognized stock exchange.

●     Otherwise, it will be charged as per the rate in the Income Tax slab under which your income falls.

Long-Term Gain :

●     Exempt from tax if,

○     Securities Transaction Tax has been paid on purchase and sale of the equity shares, and,

○     Your long-term gain doesn’t exceed Rs. 1 Lakh.

●     Taxable @ 10% (plus surcharge and cess as applicable) if,

○     Securities Transaction Tax is paid on purchase and sale of the equity shares, and,

○     Your long-term gain exceeds Rs. 1 Lakh.

●     Taxable @ 10% (plus surcharge and cess as applicable) if your transaction doesn’t fall under any of the above two categories and you choose NOT to take the benefit of indexation.

●     Taxable @ 20% (plus surcharge and cess as applicable) if your transaction doesn’t fall under any of the above three categories.

What About Losses?

Sure, it’s amazing if you are able to sell your shares at a profit. But what if you suffer a loss? It doesn’t feel good. Thankfully the Income Tax Act, 1961 has provisions where you can not only set off your losses against certain incomes but also be able to carry forward these losses so that you can set them off against future incomes.

Set Off Provisions for Losses :

Now, just like taxes related to profits, set off provisions related to losses are also dependent on whether they are short-term or long-term.

●     Short-Term Losses - Short-term losses can only be set off against either short-term capital gains or long-term capital gains.

●   Long-Term Losses - Long-term losses can be set off only against long-term capital gains.

If for any reason there are no capital gains or the capital gains are insufficient to absorb the losses, they can be carried forward for 8 years.

However, in the subsequent years you can only set off capital losses in the manner mentioned above.

Also, the losses can be set off only if you have filed income tax returns on or before the due date in the year in which you had incurred losses.

Conclusion

Understanding the impact of income tax on your gains or losses isn’t as hard as everyone makes it to be. The best part of it is that if you understand it and understand it well, it can make your investment decisions even better.

After all, who doesn’t like to enjoy their profits. 

Reporting of GST, GAAR details in tax audit report deferred till Mar 2019

The CBDT in the new ITR forms and 3CD for AY 2017-18 had required prescribed persons to furnish the tax audit report along with the disclosures related to General anti tax avoidance rules (GAAR), Specified financial transactions (SFT), expense break up related to entities with regards to GST and among others.

The same has been deferred to AY 2018-19 for those people to whom tax audit is applicable i.e., in 3CD. In case of those assessee’s who file ITR-6, they have to declare the details of expense break up related to entities with regards to GST and among others only.