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Tax Implications on Demat Account

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Maharshi Shah

Income Tax
Tax Benefits
Tax on Demat Account

Individuals are always looking for investment options that will help them grow their wealth. One of the ways in which an individual can grow their investment corpus is by investing in stock markets. It is necessary to open a demat account in order to invest in the market and also, it is important to understand the tax implications that will be applicable to the demat Account.

What is a Demat Account?

It is an account that allows you to hold your shares in an electric format. A demat account dematerializes the shares i.e., converts the physical shares into an electronic form. The working of a demat account is similar to that of savings bank account. In a demat account, one can debit and credit their securities on their own at any given point in time.

What are the Tax Implications on a Demat Account?

Tax can be imposed on the earnings of a demat account in the following ways:

Tax on Short Term Capital Gains

Any asset held for more than 12 months or less is classified as short-term capital assets. These assets can be equity shares, preference shares, debentures, government securities, bonds and mutual funds. The gain that is derived by selling such short-term asset is termed as short-term capital gains.

Now, there is a short-term capital gains tax levied on the gains that are derived by selling these assets. Short term capital gains being special rate income are taxed at 15% irrespective of your tax slab rate when STT is applicable. In cases where STT is not applicable, the capital gains made by you over the short-term is clubbed with your total taxable income.

Tax on Long Term Capital Gains

Any asset that you hold for more than 12 months or more is classified as long-term capital assets. The gain that a taxpayer earns by selling long term assets is called Long-term capital gains.

Just like STCG, there is a long-term capital gain tax levied on the sale of long-term capital assets. Currently, long term capital gains up to INR 1,00,000 are exempt from taxation, and tax is applicable at 10% (without indexation) above that amount.

Tax on Short Term Capital Loss

A short-term capital loss will occur when one sells their short-term capital assets at a price below the purchase price. The Income Tax Act allows an individual to set off this STCL against the LTCG or the STCG that one has incurred in the financial year.

If one is unable to entirely set off their short-term losses in the same year then the provision allows carrying forward the loss for a maximum of 8 financial years.

Tax on Long Term Capital Loss

A long-term capital loss will occur when one sells their long-term capital assets at a price below the purchase price. As of February 4, 2018, the income tax act allows to set off LTCL against LTCG for all transfers made on or after 1st April 2018.

Similar to STCL, one can carry forward a long-term capital loss for up to 8 years. Settling LTCG is only possible against the corresponding LTCG made by an investor during a particular year.

Got Questions? Ask Away!

  1. Hey @sushil_verma

    There are a wide range of deductions that you can claim. Apart from Section 80C tax deductions, you could claim deductions up to INR 25,000 (INR 50,000 for Senior Citizens) buying Mediclaim u/s 80D. You can claim a deduction of INR 50,000 on home loan interest under Section 80EE.

  2. Hey @Dia_malhotra , there are many deductions that you can avail of. Your salary package may include different allowances like House Rent Allowance (HRA), conveyance, transport allowance, medical reimbursement, etc. Additionally, some of these allowances are exempt up to a certain limit under section 10 of the Income Tax Act.

    For eg,

    • Medical allowance is exempt up to INR 15,000 on a reimbursement basis.
    • Children education allowance is exempt up to Rs. 200 per child per month up to a maximum of two children.
    • Conveyance allowance is exempt up to a maximum of Rs. 1600 per month.

    Tax on employment and entertainment allowance will also be allowed as a deduction from the salary income. Employment tax is deducted from your salary by your employer and then it is deposited to the state government.

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