Stock market investment is a potential way of growth, but understanding the tax on shareholdings in a Demat account is very essential for compliance with financial liabilities. A Demat account is the short form for a dematerialized account used for storing shares in an electronic format, and it makes the process of trading, like buying and selling stocks and other securities or shares, pretty easy. But to save an investor from paying an unwanted amount as taxes, he must be aware of the level of taxes charged on self-held securities.
Table of Contents
What is a Demat Account?
Basically, a Demat account is an account pass-through in nature, in which the shares and securities are held in an electronic format; hence, all physical requirements for the certificates are ruled out. This form of account offers frictionless transaction processing; hence, buying and selling and keeping a close watch on one’s holdings become facile. Since the shareholdings are held in electronic format, it also cuts down risks like damage, theft, or loss related to the physical certificates. In simple words, for detailed clarification see this demat account meaning. Now, let’s delve a little into the tax implications for holding shares in a demat account.
Capital Gains Tax
One of the main tax considerations when holding shares in a demat account is capital gains tax. Capital gains tax is the tax levied on the profit and gain made by the sale of shares, and its rate is determined by the period for which the shares were held. Two sources of capital gains taxes are:
- Short-term capital gains when the shares are held for less than one year are considered. After this period, the gains on the sale of the shares would be considered short-term, attracting a primary short-term capital gains income tax of 15 percent, irrespective of the investor’s income tax bracket.
- LTCG: In cases where shares are held for more than one year, the gains are considered long-term. Long-term capital gains up to ₹1 lakh per year are exempt. Beyond gains of ₹1 lakh, the rate of tax is 10% without the benefit of indexation.
Thus, it needs to be mentioned that the capital gains tax comes payable only on the sale of shares. Having a share in one’s demat account and not selling it doesn’t attract the capital gains tax and hence is a great option for the long-term investors who like to hold their shares over time.
Dividend Income Tax
The investors who hold shares in a demat account may also receive dividends from the companies in which they have invested. Dividends are considered income, thus coming under the ambit of taxation. This is how dividends are taxed:
- Dividend Income: The dividends that accrue on shares are aggregated to the total income of the investor and taxed at the applicable income tax slab rates. This tax is irrespective of whether his shares are in the demat account or not. Earlier, the companies were liable to pay DDT on the declaration of dividends. However, in 2020-21, this DDT was nil, and the responsibility of paying tax on dividends came onto the person receiving it.
Securities Transaction Tax (STT)
While trading shares held in a Demat account, the investor is obliged to pay Securities Transaction Tax. STT is levied on the buying and selling of shares on the recognized stock exchanges. In fact, though a minor component, it is equally important to consider since an addition of this kind modifies the cost of the transaction every time. STT is charged at different buying and selling rates for shares and is deducted automatically at the time of the transaction.
Tax Deduction at Source on Dividends
Besides income tax, the dividends on shares are also liable for deduction through TDS. If the dividend to be distributed in a single financial year is more than ₹ 5,000, the company paying the dividend will deduct TDS @ 10%. If the PAN details of such an individual are not submitted, the rate becomes 20%. The TDS amount so deducted is allowed to be claimed as credit against the tax payable while filing the income tax return.
Reporting and Compliance
The shareholders are supposed to report all the income and capital gains arising from the holdings in the dematerialized account for compliance. Their reporting could include short-term or long-term capital gains and income from dividends during the return filing of income tax. Proper record maintenance of transactions of purchase price and date will ensure ease in the filing of taxes and maintain transparency with the concerned tax departments.
Conclusion
Properly understanding the tax implications of holding shares in a demat account can make quite a difference in maximizing returns on investment. By monitoring the capital gain, dividend income, and applicable taxes such as STT and TDS, the investor will be in a better position to handle their financial obligations. The more complete awareness an investor may have about liabilities arising because of these provisions in tax law, the more confident they can be in investment decisions without finding themselves in a surprise tax situation.