Understanding the different laws and regulations of countries across the world can sometimes be difficult because of the technical jargon that these laws are laced with. Regular updates to existing laws can make it a little hard to keep up-to-date with our awareness of the guidelines that govern our everyday life. For this reason, we have decided to list down and explain the relevant income tax laws on stock market transactions that every citizen of India must know about. This article can serve as the basis of an income tax calculator and capital gains calculator.
Income tax rules for stock markets vary according to the type of income submitted. There are two types of incomes- short-term capital gains and long-term capital gains.
Short Term Capital Gains
Short-term capital gains refer to the income you earn as a result of the sale of an investment that has been under your ownership for less than a year (12 months). This type of capital gain requires the payment of a tax rate of 15% to follow it. In a situation where a short-term capital loss is incurred, the loss can be carried forward to the next 8 years within which it can be set off by the earning of short-term capital gains.
Long Term Capital Gains
Long-term capital gains refer to the income an individual earns after the trading of an investment that has been held for a duration that is longer than a year (12 months). It is accompanied by a 10% income tax rate. Similar to the treatment of short-term capital losses, if a situation arises where long-term capital losses are suffered, an individual can carry forward this loss to the next 8 consecutive years. This loss can subsequently be set off by any short-term capital gain earnings.
Filing income tax returns requires transparency. Listing down every source of income that an individual earns is important. There are two main forms that need to be filled out depending on your investments. These two forms need to be remembered as they each serve a different purpose.
Income Tax Return- 2 Form
Income Tax Return- 2 or ITR-2 is a form that needs to be filled if an individual investment falls under a cash segment. Investments that fall under the cash segment category include the categorisation of the above-mentioned capital gains- short-term capital gains and long-term capital gains.
Income Tax Return- 3 Form
Income Tax Return- 3 or ITR-3 refers to a form that a taxpayer in India must fill out and submit if they fall under a derivative segment. Aggressive intraday traders fall under this category. This form is considered to be more ‘ideal’ than the ITR-2 form because of its integrated adjustment capacity. Submission of this form allows a taxpayer in India to adjust their paid-up capital to fulfill trading purposes. This includes the rent of a house, an electricity bill payment and so on that has been used for trading purposes.
Dividend Distribution Tax
Most individuals tend to keep track of the information that has been mentioned so far along with their updates but dividend distribution taxes are often not paid much heed. They form an important component of income tax laws as well. Before the establishment of Budget 2020, a dividend distribution tax was levied on those corporations that declare their dividends to shareholders. According to this rule, up until March 31, 2020, any distributable profits earned by a company needs to be declared by companies. This declaration must be followed up by a 20.56% tax rate being paid to the government. As per earlier law (that is now declared redundant since the change in law as mentioned in Budget 2020), a 10% dividend distribution tax rate has to be paid if an individual earns a dividend that is greater than Rs. 10 lakhs. Now, the tax rates that you need to pay to depend on the tax bracket you fall under. This tax bracket is decided based on how much dividend you earn, after the adjustment of your losses. Any dividend earned is added to your income.
Securities Transaction Tax
The securities transaction tax was incorporated in income tax law books in 2004. The reasoning behind its establishment is to prevent the occurrence of tax evasion by traders or investors in India. This tax is rather simple to understand and compute. It is charged against every security purchased or sold in the stock market. It must be paid after every security transaction is made. These securities include derivatives, shares, and equity mutual funds. Since December 2017, equity transactions that are purchased and sold need to be aided by a 0.1% securities transaction tax rate payment. To encourage the purchase of securities, another law was passed in support of this tax. A 0.25% securities transaction tax rate needs to be paid while selling a security during an intraday period. However, no securities transaction tax needs to be paid when purchasing securities during the intraday period.
To conclude, although following up with income tax laws can be difficult at times, it is imperative to understand the tax laws that support every transaction you make and every type of income you earn. This article elaborates on the different tax rates that a consumer needs to pay depending on the income they earn and how it is treated. The relevant forms that need to be filed are also mentioned above. Income Tax Return- 2 and Income Tax Return- 3 are forms that need to be filled out and submitted depending on the type of investment category you fall under. The Income Tax Return- 2 form requires an individual to understand the difference between short-term capital gains and long term capital gains.
Securities transaction tax and dividend distribution tax are often ignored. Each of these laws was established to prevent the occurrence of tax evasions by investors and traders. Each of them follows different tax rates and caters to different investment decisions. The securities transaction tax rates are different for intraday transactions. This is done to encourage the purchase of securities.