Income Tax on Demat Account

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 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:

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. 

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.

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..

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.