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Demat accounts are required to store your securities and trade in the stock market. They primarily serve as a repository for your dematerialised shares. However, as an investor, you are liable to pay tax on Demat account transactions. 

 

This mainly applies to when you decide to sell your shares, and there are different implications. Knowing these terms is important, and you need to pay close attention to the income tax provisions on Demat accounts when managing your portfolio. 

 

Read on to learn about income tax on Demat transactions and more.

Income Tax Provisions on a Demat Account

Income tax on Demat transactions is levied whenever you decide to sell your shares. There are various tax implications based on the nature of the sale. Here is a quick overview:

Short-Term Capital Loss

If you decide to sell your shares in the same financial year and incur a loss, it is termed as a short-term capital loss. At this stage, the Income Tax Act has two provisions that help you offset these losses. 

 

Here, you have the option to reduce your tax liability on other capital gains made for the given year. In the event that your losses are more than your capital gains in a financial year, you could carry them forward. You can do so for up to 8 years. 

Long-Term Capital Loss

Before the 2018 financial budget, you could not offset or carry forward long-term capital losses incurred from selling your shares. This is because long-term capital gains and losses were tax-exempt. 

 

However, since Budget 2018, long-term capital gains exceeding ₹1 Lakh have been taxed at 10%. Along with that, the government now allows you to carry forward the losses from selling your shares. 

 

Do note that, you can only offset your long-term capital losses against long-term capital gains earned in a financial year.

Short-Term Capital Gains

 

Selling your equity shares within a year of purchase and earning a profit on it is termed as a short-term capital gain (STCG). Income tax on demat transactions of this nature is clearly set, and the STCG tax rate is 15%. This is applicable on the gains and you are liable to pay it only if the shares are sold within 12 months of holding them. 

 

However, this rate is only applicable if the securities transaction tax (STT) is also levied. In case STT isn’t levied, your gains will be taxed as per your income tax slab rate..

Long-Term Capital Gains

Selling your shares after one year since its purchase and earning a profit from the sale is termed as long-term capital gains (LTCG). Earlier, LTCG were exempt from taxation, and this meant that the tax on Demat account transactions was nil. 

 

With the financial budget of 2018, this exemption was removed. Now, if your gains exceed the ₹1 Lakh mark, you are liable to pay LTCG tax at the rate of 10%. In case your gains are under ₹1 Lakh, they will be exempt from taxation for the financial year. 

Securities Transaction Tax

Securities Transaction Tax is a direct tax that is levied on all equity shares that you buy or sell on a stock exchange. 

 

  • Ways of Saving Tax Through Investing

As an investor, minimising your tax liability is one way to get more out of your investing strategy. Here are a few ways you can save tax. 

 

  • Equity Linked Saving Scheme

Equity Linked Saving Scheme or ELSS is an investment instrument that comes under the mutual fund category. In ELSS, a major part of your fund goes towards equity and its associated securities. 

 

This investment is ideal if you want to lower your tax liability and continue earning returns. With ELSS, you can get tax deductions of up to ₹1.5 Lakhs u/s 80C. Keep in mind that ELSS investments have a lock-in period of three years.  

 

  • Unit Linked Insurance Plan

Unit Linked Insurance Plan or ULIP can be an efficient investment that you can choose to lower your tax liabilities, if you invest smartly. With a ULIP, you get the freedom to decide how to allot your money. 

 

You can distribute your funds across equity, debt as well as hybrid funds. Here, you can avail tax deductions of up to ₹1.5 Lakhs u/s 80C. Along with this, you also get tax deductions on the amount that you get on maturity. This is covered u/s 10 (10D).

 

With this information in hand, you can understand the tax implications associated with Demat accounts. However, if you don’t have an account but wish to invest in the stock market, create your account on Bajaj Markets. The process is quick, easy, secure, and can be completed online for a hassle-free experience.

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FAQs on Income Tax on Demat Account

How can I save taxes on the sale of my shares?

You can avail tax exemption by selling your shares and reinvesting the gains. The shares could be sold annually, allowing you to leverage the LTCG exemption for gains under ₹1 Lakh. Then, you could use these gains to buy new shares. This will help you save taxes annually, resulting in a roughly 10% reduction in tax outgo on ₹1 Lakh.

How much tax do I need to pay on transactions of shares made through Demat?

For short-term capital gains, you need to pay a 15% tax if securities transaction tax is applicable. Or else, you must pay taxes at the rate applicable on your income. Under LTCG, you could enjoy tax exemption on up to ₹1 Lakh. On exceeding ₹1 Lakh, you must pay 10% tax and any applicable Cess.

Do I have to pay tax on owning a Demat account?

No, you do not have to pay tax for owning a Demat account.

Do I pay tax for holding shares in a Demat account?

You are only taxed on the gains made when you sell your shares. Holding your shares does not attract any tax.  

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