With small savings and deposits rate gradually declining every year, investors have an option to put their hard earned money into stock market and earn more profit. However, investment into stock market comes fraught with risks and taxes which will minimise your returns.
Here's a look at various taxes that affect your earnings from stock markets.
There are two kinds of taxes - Direct taxes (such as Income tax or Corporate tax) and Indirect taxes (such as GST). There are some taxes which are levied by the central government, whereas few others are levied by the state government. An investor or trader in stock markets is affected by both these taxes.
Whenever we trade on the stock markets, we incur some mandatory charges (such as Brokerage, Transaction & Turnover Charges) and taxes (such as securities transaction tax/ commodities transaction tax and Stamp Duty). Besides, an investor is also required to pay capital gains tax on his overall earnings from the stock markets. Let's understand these taxes in more detail.
Capital Gains Tax: Capital Gains tax is determined in accordance to the laws of the Income Tax Act, 1961 and is divided between Long Term Capital Gains (LTCG) and Short Term Capital Gains (STCG) according to the period of holding by the investor. Taxation on LTCG is usually lower compared to that on STCG as the government wants to promote long term investing. STCG taxation also varies depending on whether the person is in the business of trading or not, and whether the income is coming from speculative (i.e. intraday trading) or non-speculative (i.e. F&O) sources.
STT / CTT: Securities Transaction Tax or Commodities Transaction Tax is a kind of Direct Tax, levied on the total turnover of transactions executed through a stock exchange. These are not levied on off-market transactions. It was introduced in 2004 by then Finance Minister P. Chidambaram to control capital gain tax avoidance, and is one of the most debated taxes in stock market investing till date.
Stamp Duty: It is determined and collected by the state where trading takes place.
Stock Market investing involves trading in the shares of listed entities, which are companies that operate in various industries. As a shareholder of these companies, you are part owner of the company itself, and therefore any taxes paid by the company are paid indirectly from your pocket. The notable taxes paid by companies are as follows:
Corporate Tax: Companies are required to pay tax on income earned and reported by them, known as Corporate Tax
Dividend Distribution Tax (DDT): DDT is paid when companies decide to distribute their profits to shareholders in the form of dividends. This ultimately reduces dividends paid to the shareholders, which are a major source of earnings for many investors in the stock market.
Dividend Tax: An additional tax is levied in the hands of the dividend recipient who receives dividends in excess of Rs. 10 lakh per year.
Buy-Back Tax: The recently announced Union Budget introduced a buy-back tax equivalent to the DDT, which will reduce the income in the hands of the investors opting for a buy-back.
As can be seen, there are multiple levels of taxation that impact your earnings from the stock markets, some directly and others indirectly. As an informed investor, it is useful to know how much tax we have to pay to the government while trading in stock markets.
(Amit Gupta is CEO and Co-founder at TradingBells)