How are stock market transactions taxed?

Investing in the stock market can be a great way to build wealth over time. However, it is important to understand the tax implications of stock market transactions. In India, the tax treatment of stock market transactions is governed by the Income Tax Act, and the taxes depend on whether the gains are short-term or long-term. In this article, we will explore how stock market transactions are taxed, including tax rates for capital gains, dividend income, and other related aspects.

1. Tax on Capital Gains

The tax treatment of gains from the sale of stocks is divided into two categories based on the holding period of the stocks:

• Short-Term Capital Gains (STCG): If you sell a stock within 12 months of purchasing it, any gain will be considered short-term. In India, short-term capital gains on stocks are taxed at 15%, provided the transaction is subject to Securities Transaction Tax (STT).
• Long-Term Capital Gains (LTCG): If you hold the stock for more than 12 months before selling, any gain is considered long-term. In India, long-term capital gains on stocks are tax-free up to ₹1 lakh per financial year. Any gains above ₹1 lakh are taxed at 10%, without the benefit of indexation.

2. Tax on Dividend Income

In addition to capital gains, the tax on dividends also plays a significant role in the overall taxation of your stock market investments. Dividends received from Indian companies are subject to taxation as income.

• Taxable Dividend Income: Dividend income is taxable at your applicable income tax slab rate if the total dividend income exceeds ₹5,000 in a financial year. The company distributing the dividend is required to deduct a 10% Tax Deducted at Source (TDS) on dividends above ₹5,000.
• Dividend Distribution Tax (DDT): Prior to 2020, Indian companies were required to pay a Dividend Distribution Tax (DDT) on dividends paid to shareholders. However, DDT was abolished in 2020, and now dividends are taxed in the hands of the investors directly.

3. Securities Transaction Tax (STT)

Securities Transaction Tax (STT) is a tax imposed on the purchase and sale of securities listed on recognized stock exchanges. The STT is applicable when you sell stocks or mutual funds, and it is deducted at the time of the transaction. It is important to account for this tax when calculating your gains.

• STT on Equity Shares: For equity shares, the STT is charged at 0.1% on both the buy and sell transaction value for delivery-based transactions.
• STT on Intraday Trading: For intraday trades (where you buy and sell the stock on the same day), the STT is charged at 0.025% on the sell transaction value.

4. Tax on Capital Losses

If you incur a loss on the sale of stocks, you can offset that loss against capital gains for tax purposes. This is known as "set-off" of losses. Here’s how it works:

• Short-Term Capital Losses (STCL): Short-term capital losses can be set off against short-term or long-term capital gains. If there is a loss remaining after the set-off, it can be carried forward for up to 8 years to offset future gains.
• Long-Term Capital Losses (LTCL): Long-term capital losses can only be set off against long-term capital gains. Like short-term losses, they can be carried forward for 8 years.