Income Tax on Demat Account

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Maharshi Shah

Capital Gains
Income Tax
Tax on Demat Account
Last updated on February 19th, 2024

Investing in stocks is a popular way for many people to increase their wealth. To start investing, they usually need to open a demat account. However, it’s crucial to have a good understanding of the income tax applicable to this account so that they can pay taxes correctly while filing income tax returns. Knowing about the applicability of tax on Demat account can help investors make informed decisions and manage their investments more effectively. Being aware of the tax implications allows investors to plan their strategies and make the most of their financial gains.

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 a 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?

Whenever there are any sale transactions from the demat account, the taxes will be levied accordingly. Here, since the transactions will be of shares and other securities, the capital gains tax will be levied. Further, the tax rates will be based on the holding period of securities.

Short-Term Capital Gains/Losses

Any asset held for 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 assets is termed short-term capital gains.

Tax on Short term capital gains (STCG):

Further, in the case of short-term capital loss (STCL), it can be set off 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.

Long Term Capital Gains/loss

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

Tax on Long-term Capital Gains (LTCG):

Long-term capital gains up to INR 1,00,000 are exempt from taxation, and tax is applicable at 10% (without indexation) over and above that amount.

Further, in the case of long-term capital losses, it can be set off against long-term capital gains only. If any losses remain after setting off against the current year LTCG then it can be carried forward for the next 8 years.

FAQs

What is a Demat account?

A Demat account is a virtual account just like your savings bank account. In these accounts, your shareholdings are in electronic format.

What happens if I sell my shares from the Demat account?

In such cases, the capital gains taxes will be levied based on the period of holding.

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.

  3. The benefit Section 80EEB can be claimed by individuals only. An individual taxpayer can claim interest on loan of an electric vehicle of up to INR 1.5 lacs u/s 80EEB. However, if the electric vehicle is used for the purpose of business, the vehicle should be reported as an asset, loan should be reported as a liability and the interest on loan can be claimed as a business expense irrespective of the amount. (We have updated the article with the changes).

    Thus, if you have a proprietorship business, you should claim interest amount as a business expense only if the vehicle is used for business purpose. However, if it is used for personal purpose, you can claim deduction of interest u/s 80EEB in your ITR since you would be reporting both personal and business income in the ITR (under your PAN).

    As per the Income Tax Act, the deduction under Section 80EEB is applicable from 1st April 2020 i.e. FY 2020-21.

  4. Hey @Sharath_thomas , we have updated the content according to the appropriate assessment year. Thanks for the feedback. :slight_smile:

  5. Hey @shindeonkar95

    In case of capital gain income (LTCG/STCG), transfer expenses are allowed as deduction, except STT.

    However, in case of business income (F&O, intraday), all expenses incurred for the business (including STT) are eligible to claim deduction in ITR.

    Hope, it helps!

  6. Hello,

    Is it possible to claim deductions under S. 80CCF for Infra bonds bought in the secondary market and held to maturity?

    There were a number of 10 year infra bonds issued in the 2010- 2013 period, which will start maturing soon. These are all listed on the exchanges (although hardly any liquidity or transactions in them). If I were to buy some of these bonds in the open markets and hold them in my demat to maturity (<3 years), is it possible to claim tax deductions (upto 20k per year) under 80CCF for buying?

    I couldn’t find anything on this. Any help is appreciated.

  7. Hello @Veejayy,

    Yes you can claim deduction under 80CCF for investment made in specified infrastructure and other tax saving bonds bought in the secondary market and held to maturity.

    Deduction under Section 80CCF can be availed only through investment in certain tax saving bonds, issued by banks or corporations after gaining permission from the government which shall be restricted upto 10,000 per year.

    These bonds are generally long term bonds, having tenure of more than 5 years with a lock in period of 5 years in most of the cases. These bonds can be sold after the lock in period!

    Also, interest earned on these bonds will be taxable.

    Hope this helps!

  8. Hi, I need to file my income tax for FY21, I am using Quicko platform for filing, I wanted to confirm if the ELSS investment amount for the FY21 is to be added in the section 80C, since I already the amount of Rs30,072 , should I add my ELSS amount to this existing amount and submit the total

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